Director Stock Compensation: An Invitation to a Conspicuous Conflict of Interests?

2001 ◽  
Vol 11 (1) ◽  
pp. 89-108 ◽  
Author(s):  
Dan R. Dalton ◽  
Catherine M. Daily
Keyword(s):  
Mergers And Acquisitions ◽  
Boards Of Directors ◽  
Stock Options ◽  
Conflicts Of Interest ◽  
Stock Option ◽  
Corporate Managers ◽  
Performance Targets ◽  
Compensation Packages ◽  
Stock Buybacks ◽  
Stock Compensation

Abstract:While many aspects of stock and option based compensation for corporate officers remain controversial, we suggest that the growing trend for similar practices in favor of boards of directors will prove to be even more contentious. High-ranking corporate managers do not set their own salaries nor authorize their own stock options. By contrast, boards of directors do, in fact, set their own compensation packages. Other potential conflicts of interest include setting option performance targets, stock buybacks, stock option resets and reloads, consolidations (mergers and acquisitions), and service on multiple boards. As trust is the most valuable commodity in a capitalist society, we suggest that these potential conflicts of interest and related outcomes may ultimately serve to erode any anticipated benefits of director stock compensation.

The Effect of Incentives: Managing for Ethics

2021 ◽  
pp. 119-140
Author(s):  
Jason Brennan ◽  
William English ◽  
John Hasnas ◽  
Peter Jaworski
Keyword(s):  
Stock Prices ◽  
Stock Options ◽  
Conflicts Of Interest ◽  
Profit Sharing ◽  
Business Leaders ◽  
Internal Conflicts ◽  
Compensation Packages

Every business faces internal conflicts of interest. They must determine how to motivate employees to cooperate in a productive manner, while also limiting the temptation to exploit the business for private gain. Designing good incentives is essential. If inputs are easy to measure, employees can be compensated based on how much work they do, but if inputs are hard to measure, it may be more effective to tie compensation to a firm’s output in the form of stock options and profit-sharing. However, care must be taken to ensure that executives do not misrepresent the value of the company or engage in fraud in order to inflate stock prices. Compensation packages that lengthen the vesting period of stock options and allow ill-gotten gains to be clawed back, as well as whistleblower programs that reward those who expose fraud, can help prevent bad behavior and ensure that business leaders focus on genuine productivity.

scholarly journals On the pros and cons of employee stock options: What are the alternatives?

2006 ◽  
Vol 4 (1) ◽  
pp. 266-283
Author(s):  
Kuntara Pukthuanthong ◽  
Thomas Walker
Keyword(s):  
Stock Options ◽  
Stock Option ◽  
Employee Stock Options ◽  
Corporate Managers ◽  
Alternative Compensation ◽  
Clear Cut ◽  
Advantages And Disadvantages ◽  
Compensation Package ◽  
Accounting Scandals ◽  
Regulatory Bodies

Despite theoretical validity, there is mixed empirical evidence on whether employee stock options align the interests of management and shareholders by turning managers into owners. Yet, recent accounting scandals, excessive payouts, and the public’s call for a proper recognition of stock option grants have produced considerable debate in boardrooms and the financial press about the desirability of using stock options. This paper provides an overview of the empirical research in the field and discusses the advantages and disadvantages of using stock options as part of an employee’s compensation package. In light of the recent accounting scandals, regulatory bodies have been hard pressed to change the accounting treatment and recognition of stock options. As a result, practitioners and academics are increasingly on the lookout for alternative forms of compensation tools. To aid in the ongoing discussion, we propose a number of alternative compensation tools that help alleviate some of the problems inherent in stock options, while still rewarding a manager for his performance and aligning management and shareholder incentives. While there is no clear-cut answer as to what compensation tool is best, our study should provide corporate managers with the necessary insights that are needed to choose the method that most closely meets their objectives. In addition, our study aims to open the door for further academic discussion that is required to address a number of questions that remain unanswered in this area

Investor Sentiment and Stock Option Vesting Terms

2021 ◽  
Author(s):  
Shawn X. Huang ◽  
Sami Keskek ◽  
Juan Manuel Sanchez
Keyword(s):  
Mergers And Acquisitions ◽  
Stock Options ◽  
Investor Sentiment ◽  
Stock Option ◽  
Capital Expenditures ◽  
Short Term ◽  
Compensation Contracts ◽  
Theoretical Predictions ◽  
One Year

Using the details of vesting terms, we document that stock options granted in high-investor-sentiment periods tend to have shorter vesting periods and durations and are more likely to vest completely or have a significantly larger fraction vested within one year of the grant date, relative to low-sentiment periods. We further find that the sentiment effect on vesting terms is more pronounced when firms are largely held by investors with short investment horizons (e.g., transient institutions). Moreover, short vesting terms in high-sentiment periods are positively associated with future mergers-and-acquisitions activity and capital expenditures. Overall, our findings are consistent with theoretical predictions that, in a speculative market, shareholders incentivize managers with short-term-oriented compensation contracts to induce managers to pursue actions maintaining overvaluation. This paper was accepted by Shiva Rajgopal, accounting.

Accounting for Employee Stock Options

2004 ◽  
Vol 18 (2) ◽  
pp. 135-156 ◽  
Author(s):  
Michael Kirschenheiter ◽  
Rohit Mathur ◽  
Jacob K. Thomas
Keyword(s):  
Stock Options ◽  
Financial Statements ◽  
Cash Flows ◽  
Stock Option ◽  
Share Price ◽  
Employee Stock Options ◽  
Deferred Taxes ◽  
Recommended Treatment ◽  
Option Values ◽  
The Common

Accounting for employee stock options is affected by whether outstanding options are viewed as equity or liabilities. The common perception is that the FASB's recommended treatment (per SFAS No. 123), which is based on the options-as-equity view, results in representative financial statements. We argue that this treatment distorts performance measures for three reasons. First, the deferred taxes associated with nonqualified options should also be included as equity, but are not. Second, since unexpected share price changes affect optionholders and equityholders differently, combining their interests provides an average earnings effect that is not representative for either group. We show that efforts to isolate the interests of common stockholders via diluted earning per share calculations (per SFAS No. 128) are inherently incapable of identifying wealth transfers between stockholders and optionholders. Finally, projections of future cash flow statements prepared under SFAS No. 95 overstate cash flows to current equityholders by the pretax value of projected option grants. We show that these distortions can be avoided simply by accounting for options as liabilities at grant and thereafter recognizing changes in option values (similar to the accounting for stock appreciation rights). Our analysis of stock option accounting leads to two, more general implications: (1) all securities other than common shares should be treated as liabilities, thereby simplifying the equity versus liability distinction, and (2) these liabilities should be recorded at fair values, thereby obviating the need to consider earnings dilution.

SFAS No. 123 Disclosures and Discounted Cash Flow Valuation

2000 ◽  
Vol 14 (2) ◽  
pp. 169-189 ◽  
Author(s):  
Leonard C. Soffer
Keyword(s):  
Cash Flow ◽  
Stock Options ◽  
Stock Option ◽  
Financial Statement ◽  
Employee Stock Options ◽  
Financial Statement Analysis ◽  
Discounted Cash Flow ◽  
Employee Stock Option ◽  
Valuation Technique ◽  
Discounted Cash Flow Valuation

One of the cornerstones of financial statement analysis is the discounted cash flow valuation. Despite the broad use of this valuation technique, and the economic importance of employee stock options to firm values, there is little guidance on how employee stock options should be incorporated in a valuation. This paper provides a comprehensive approach to doing so, including consideration of the income tax implications of option exercises, the simultaneity of equity and option valuation, and the use of the disclosures that were mandated recently by Statement of Financial Accounting Standards No. 123. The paper provides a comprehensive example using Microsoft's fiscal 1997 financial statements and employee stock option disclosure. This paper should be of interest to academics and practitioners involved in corporate valuation and financial statement analysis.

scholarly journals Corporate governance and IPO underpricing: evidence from the italian market

2021 ◽  
Author(s):  
Emanuele Teti ◽  
Ilaria Montefusco
Keyword(s):  
Corporate Governance ◽  
Initial Public Offering ◽  
Boards Of Directors ◽  
Stock Option ◽  
Board Members ◽  
Ipo Underpricing ◽  
Italian Market ◽  
Public Offering ◽  
The Impact ◽  
Positive Effect

AbstractThis paper aims to analyse the impact of firms’ corporate governance characteristics on the degree of first-day returns (i.e., underpricing) in the Italian initial public offering (IPO) market. In particular, this work investigates the impacts of the characteristics of boards of directors (BoDs) and ownership structure on the underpricing of newly offered shares. By studying a sample of 128 Italian IPOs between 2000 and 2016, it is concluded that corporate governance characteristics affect the degree of first-day returns following a company’s IPO. More specifically, the size of the BoD negatively affects underpricing, while the ownership of institutional investors and board members has a positive effect on the degree of underpricing. Conversely, no significant evidence is found with regard to board independence, the number of female directors in the boardroom, the implementation of stock option plans and ownership concentration.

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