Bright And Dark Side Of Executive Equity Compensation Accounting Essay

In the organisational hierarchy, top most executives are 1-5 % of the entire work force. They are in-charge of growing and prosperity of the house. Thus compensation paid to this class is closely associated with the success of house as a whole. Hartzell and Starks ( 2003 ) concluded that institutional proctors provide much greater inducements to executives so that they can execute good and gain more inducements while at the same clip cut downing their salary ( fixed-pay ) by a great trade more. Harmonizing to bureau theory top directors of the house are the agents of the stock holders and it is assumed that involvement of both of them are the same which in existent term are non. So stockholders can try to set up in a line the involvements of top direction with their ain by supplying them with attractive compensation bundles.

Compensation is measured and loosely distinguished between two classs:

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A. Direct compensation

1. Salary

2. Bonus

3. Other hard currency compensation

4. Option grants

5. Restricted stock grants

B. Firm-related wealth alteration

1. Stock options

2. Incentives stock options

3. Non-qualified stock options

4. Value alteration of option retentions

5. Value alteration of restricted stocks

6. Net incomes from exerting options

7. Value alteration of direct equity retentions

Basic wage

Basic wage is the standard wage of the executive which besides administer pension entitlements and life insurances. Wages paid to executives are frequently influenced by the board of managers which frequently depend on information from salary studies of similar companies. Pay of top executive and other executives are set to be competitory with other executive wages in the market and therefore may be really high in comparing to the wage of employees in their ain company.


Bonuss are considered to be compensation associated with the public presentation of the executives and/or employees. They are paid in add-on to salary or rewards. Although net incomes may be one of the most popular organisational steps which can be measured in footings by administrations net incomes per portion, return on equity, return on capital and return on assets.

Equity compensation

Executive compensation consists of basic wage, fillips, long-run inducements, benefits, and fringe benefits. By and large people look at high wage of executives as the job of equity, whether wagess are higher than the part towards the administration.


Pension in general depends on the basic wage of any executive. It shows that the company is concerned about the long term involvements of its employees and is a good employer which helps company to retain high-quality people.


Benefits for executive-level employees are likely to be different than those offered to lower-level employees. Executives will frequently have high degrees of typical company periphery benefits, like wellness insurance, life insurance, and pension programs. Additionally, some executives may besides hold a contract for big rupture bundles, paying hard currency and stock options to a Chief executive officer fired from a company. Many executives negotiate generous rupture bundles at the clip of hire, so that even if they are unable to present upon promises to the company, they can roll up compensation upon issue.

Long Term Incentives

Incentives are wagess that are linked to specific long-run ends of the organisation. The most common long-run inducement is the stock option, which either gives the executive free company stock, or allows him or her to buy company stock at a decreased monetary value for a period of clip. These stocks become more valuable as the company improves financially, and hence, ownership of stock is intended to promote the executive to do the organisation more profitable.

By and large people get influence by high wage of executives as the job of equity, whether wagess are higher than the part towards the administration. There wage is therefore merely the line of deductions of their actions ( Shaq vs. George Miken ) . As they play an of import function during the span of their term so they will be awarded with high wage ( includes fillips and other inducements ) . In 1974 the Northerners signed Catfish huntsman for $ 3.75 million a five twelvemonth contract and everyone was convinced it was the terminal of the athletics and 30 old ages subsequently participants are doing good over $ 10 million contract with some much higher. Alex Rodriguez signed a 10 twelvemonth 275 million contract, yet baseball endures to pay the large vaulting horses. And the same things are go oning in the athleticss and other concern universe. Most of the research on executive compensation is after 1992 because of Compustat executive compensation database ( ExecuComp ) where it provides drumhead compensation informations, every bit good as full inside informations on executive stock and option awards every bit good as pension programs leting you to see the complete image of how executives are compensated.

Bright side:

Performance based inducements brings out more of growing chances within the company, it besides involves more of hazard pickings and promotes long term orientation. A campaigner might be more likely to come to work for the company if certain promises are locked in by a contract, such as base wage, fillip, benefits and causes for expiration. It & amp ; acirc ; ˆ™s an advantage for the company as it involves minimum administrative costs and record maintaining. Particular allowance such as overtime, nomadic allowances, repasts, committees, travel disbursals, decreased involvement loans ; insurance, nine ranks, etc. can be granted to employees to supply them societal security and actuate them which better the organisational productiveness. Bonus are non merely wagess for an employee ‘s past public presentation but it besides holds an feeling of company ‘s public presentation in the market.

Dark side:

The basic wage, fillip, inducements, and benefits for executives have raised serious inquiries about the reverberation of such wage. One concern about the high wage degree for executives is that they may promote executives to do concern determinations that benefit themselves instead than the organisation in order to run into public presentation ends necessary to have incentive wage. For illustration, an executive may drive up short-run net incomes that can non be sustained, merely to roll up a big fillip and leave the company before long-run fiscal jobs are revealed. A 2nd concern of high executive wage is the usage of stock options as an inducement. Recent grounds of illegal patterns in some high-profile American companies has prompted the passage of the Sarbanes-Oxley Act of 2002. This act prevents executives of companies from maintaining net incomes or fillips acquired from selling company stock if they have misled the populace about the fiscal wellness of the company to increase stock monetary value.

& A ; Acirc ;

Finally, some inquiry the moralss of the high degree of executive wage when lower-level employee wage has non risen at the same rate. There is a continually widening spread in compensation in different degrees of organisations ; for case, the Mercer survey described antecedently determined that CEOs enjoyed fillips of 141 per centum of wage in 2004, while other surveies indicate that typical clerical and proficient staff earns about 5 per centum of wage as an one-year fillip. Although some argue that executive degree places deserve high rates of wage due to the nature of the occupation and the high degree of duty involved, others argue that the spread in executive versus typically employee wage has widened so dramatically that employees are under-compensated and may even be tempted to prosecute in unethical behaviour, such as stealing from the company.

More late, Moeller, Schlingemann and Stulz ( 2003 ) , document important negative proclamation returns and significant losingss to big geting houses, particularly for acquisitions happening after 1997. Although many researches have been conducted sing executive compensation but still there are ill-defined question of high public presentation relates to high public presentation by the directions.


In this paper we established a benchmark attack function of top direction inducements and house public presentation in act uponing fiscal deceits. Compensation made to employees established to hold outstanding effects on both company ‘s investing manners and subsequent company ‘s public presentation in the market. All types of options, including auto allowances, life insurance, resettlement payments, flexible start day of the months, subscribing fillips, usage of company-owned holiday belongings, health-club rank, tuition reimbursements, and other compensation should be considered to do the bundle competitory and attractive. Many research workers have highlighted the importance of incentive compensation in their plants ; it brings an outstanding impact non merely for the growing of employees but besides acts as a boosting factor for company ‘s public presentation in competitory scenario.

Company ‘s investing and public presentation are both responsible and effectual for fillip payments. Bonuss are non merely wagess for an employee ‘s past public presentation but it besides holds an feeling of company ‘s public presentation in the market.


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