财务会计理论(司可脱)文件10_scott_im_ch10

1、CHAPTER 10Executive Compensation1Reporting On Manager PerformanceA Second Major Role For Financial Reporting2Two Aspects of Reporting On Manager PerformanceEnable the Managerial Labour Market to Properly Value Manager Performance and ReputationProvide a Performance Measure for Managerial Incentive C

2、ontracts3Manager “EffortManager Effort Really a Set of ActivitiesPartition the Set Into Short-Run and Long-Run Decision Horizon ActivitiesShort-run activities exampleCost controlLong-run activities examplesR&D, planning, capital expenditures4Desirable Property of a Managerial Performance MeasureHigh

3、ly Informative about Manager Effort (stewardship)Informativeness depends onPrecision of the performance measureSensitivity of the performance measure5Net Income as a Performance MeasureSensitivity of Net IncomeHistorical cost-based net income “waits until many aspects of manager effort are realized

4、(recognition lag)R&D, advertisingCapital expenditure programsMay encourage a short-run decision horizonMay be managedReduces sensitivity by disguising shirking6Net Income as a Performance Measure, Contd.Impact of fair value accounting on sensitivityIncreases sensitivity by reducing recognition lag7N

5、et Income as a Performance Measure, Contd.Precision of Historical Cost-based Net IncomeRelatively unaffected by economy-wide and other events that are uninformative about manager effort8Net Income as a Performance Measure, Concl.Impact of Fair Value Accounting on Precision of Net IncomeLess precise

6、than historical cost-based net income since more subject to economy-wide factorsIf Reduction of Precision Outweighs Increase in SensitivityHistorical-cost based net income may be more informative9Share Price As a Performance MeasureSensitivity of Share PriceReflects manager effort “sooner (less reco

7、gnition lag)Efficient market recognizes expected economic effects of manager effort without waiting for realizationR&D, advertisingCapital expenditure programsMay encourage long-run decision horizon 10Share Price As a Performance Measure, ContdPrecision of Share PriceMore volatile than net incomeImp

8、acted by economy-wide events, reducing informativeness about effortInterest rate changesderegulationbooms, recessionsLess ability to manage11Share Price v. Net Income As Performance MeasuresConclude:Net income (historical cost-based) relatively precise but low in sensitivityShare price relatively se

9、nsitive but low in precision12Share Price v. Net Income As Performance Measures, Contd.Not a Question of Either/OrHolmstrm (1979) suggests use bothCan control managers decision horizon by the proportion of net income to share price in the incentive contract (Bushman & Indjejikian, 1992)More net inco

10、me shorter horizon, and vice versa13How Can Accountants Increase Role of Net Income In Incentive Plans?Fair Value Accounting?Intangibles (goodwill)ESOsFull DisclosureEnables compensation committee to evaluate earnings persistence14The BCE Compensation PlanSalaryShort-Term Incentive AwardsShare units

11、 or cash bonus, based on Attainment of strategic objectives, e.g. market share, customer satisfactionAttainment of financial targets, e.g., EPSIndividual creativity and initiative, e.g., succession planning, management developmentNote that the more senior the manager, the more compensation depends o

12、n performance. Why?15The BCE Compensation Plan, Contd.ESOsPromote longer-term manager incentivesValue to manager based on share price performanceAwarded to bring total compensation up to that of comparable companiesESOs voluntarily expensed in 200316The BCE Compensation Plan, Concl.2004 Revisions to

13、 Compensation PlanReduce ESOs by 50%. Why?Shorten decision horizon. Why?Shorten ESO time to expiryMid-term compensation planRestricted share units 17Role of RiskToo Little RiskReduces effort incentiveToo much riskManager avoids risky projectsExcessive hedgingControlling RiskRelative Performance Eval

14、uationFine in theory, but hard to find in practiceRole of Board, compensation committee 18Empirical Compensation ResearchLambert & Larcker (1987)Cash compensation (salary + bonus) more highly correlated with ROE than with return on sharesCorrelation higher as noise in NI lowerCorrelation lower for growth firmsHigher weight on ROE in compensation plan when correlation between ROE and return on shares low, and vice versa19The Politics Of Executive CompensationIs Executive Compensation Too High?Jensen & Murphy, “C