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SOCIAL SCIENCE RESEARCH NETWORK
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 7, No. 14: June 01, 2006
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Executive Compensation
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T A B L E O F C O N T E N T S
"The Business Judgment Rule, Disclosure and Executive
Compensation"
JEREMY TELMAN
Valparaiso University Law School
"Pay for Short-Term Performance: Executive Compensation in
Speculative Markets"
PATRICK BOLTON
Princeton University - Department of Economics,
Centre for Economic Policy Research (CEPR), European
Corporate Governance Institute (ECGI), National
Bureau of Economic Research (NBER)
JOSé A. SCHEINKMAN
Princeton University - Department of Economics,
National Bureau of Economic Research (NBER)
WEI XIONG
Princeton University - Bendheim Center for Finance,
National Bureau of Economic Research (NBER)
"Financial Accounting and Corporate Behavior"
DAVID I. WALKER
Boston University School of Law
"Is What's Best for Employees Best for Shareholders?"
OLUBUNMI FALEYE
Northeastern University - College of Business
Administration
EMERY A. TRAHAN
Northeastern University - Finance and Insurance Area
"Performance Measure Properties and the Effects of Incentive
Contracts"
JAN BOUWENS
Tilburg University - CentER and Faculty of Economics
and Business Administration
LAURENCE VAN LENT
Tilburg University - Department of Accounting
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"The Business Judgment Rule, Disclosure and Executive
Compensation"
Contact: JEREMY TELMAN
Valparaiso University Law School
Email: Jeremy.Telman@valpo.edu
Auth-Page: http://ssrn.com/author=391192
Full Text: http://ssrn.com/abstract=895548
ABSTRACT: Despite its ubiquity in corporate law, the business
judgment rule remains a doctrinal puzzle. Both courts and
scholars offer different understandings of the Rule's role in
litigation brought against corporate directors and different
justifications for its deployment to insulate such directors from
liability for breaches of fiduciary duties. This Article rejects
all existing justifications for the Rule and argues that the Rule
is no longer needed to protect directors from liability, either
because the justifications offered never made any sense or
because directors are now protected by other, statutory means.
Rather, the Rule is needed today to protect not directors but the
corporations they serve from the irreparable harm corporations
would suffer if forced to disclose prospective business plans in
order to defend decisions taken by their boards. This Article
follows some recent scholarship in arguing that the Rule is best
understood as an abstention doctrine and argues that courts
should invoke the Rule and abstain from the review of the
business judgment of corporate directors when the litigation that
gives rise to such review would compel the corporation to
disclose information relating to its prospective business plans.
The Article then illustrates why the Rule should not apply in
cases involving challenges to board decisions relating to
executive compensation through a detailed discussion of the
on-going litigation relating to the hiring and dismissal of the
Walt Disney Company's former President, Michael Ovitz.
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"Pay for Short-Term Performance: Executive Compensation in
Speculative Markets"
NBER Working Paper No. W12107
Contact: PATRICK BOLTON
Princeton University - Department of
Economics, Centre for Economic Policy Research
(CEPR), European Corporate Governance Institute
(ECGI), National Bureau of Economic Research (NBER)
Email: pbolton@princeton.edu
Auth-Page: http://ssrn.com/author=1940
Co-Author: JOSé A. SCHEINKMAN
Princeton University - Department of
Economics, National Bureau of Economic Research
(NBER)
Email: joses@princeton.edu
Auth-Page: http://ssrn.com/author=173218
Co-Author: WEI XIONG
Princeton University - Bendheim
Center for Finance, National Bureau of Economic
Research (NBER)
Email: wxiong@princeton.edu
Auth-Page: http://ssrn.com/author=196859
Full Text: http://ssrn.com/abstract=892132
ABSTRACT: We argue that the root cause behind the recent
corporate scandals associated with CEO pay is the technology
bubble of the latter half of the 1990s. Far from rejecting the
optimal incentive contracting theory of executive compensation,
the recent evidence on executive pay can be reconciled with
classical agency theory once one expands the framework to allow
for speculative stock markets.
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"Financial Accounting and Corporate Behavior"
Boston Univ. School of Law Working Paper No. 06-05
Contact: DAVID I. WALKER
Boston University School of Law
Email: diwalker@bu.edu
Auth-Page: http://ssrn.com/author=189230
Full Text: http://ssrn.com/abstract=894002
ABSTRACT: The power of financial accounting to shape corporate
behavior is underappreciated. Positive accounting theory teaches
that even cosmetic changes in reported earnings can affect share
value, not because market participants are unable to see through
such changes to the underlying fundamentals, but because of
implicit or explicit contracts that are based on reported
earnings and transaction costs. However, agency theory suggests
that accounting choices and corporate responses to accounting
standard changes will not necessarily be those that maximize
share value. For a number of reasons, including the fact that
executive compensation often is tied to reported earnings,
managerial preferences for high earnings generally will exceed
shareholder preferences, leading to share value reducing
tradeoffs between reported earnings and net cash flows. The
empirical literature on the details of positive accounting theory
is mixed, but the evidence firmly establishes the power of
accounting to shape corporate behavior.
The power of accounting and the divergence of interests have many
implications for courts and policy makers. For example,
consideration of proposals to increase conformity between tax and
financial accounting rules as a means of combating tax sheltering
and/or artificial earnings inflation must take into account the
incentive properties of accounting standards and recognize that
narrowing the gap between tax and book income will have economic
consequences, however the gap is narrowed. This Article considers
this and other implications of the behavioral effects of
accounting standards, including the possibility of setting
accounting standards instrumentally as a means of regulating
corporate behavior, an alternative to tax incentives, mandates,
or direct subsidies.
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"Is What's Best for Employees Best for Shareholders?"
Contact: OLUBUNMI FALEYE
Northeastern University - College of
Business Administration
Email: o.faleye@neu.edu
Auth-Page: http://ssrn.com/author=276800
Co-Author: EMERY A. TRAHAN
Northeastern University - Finance and
Insurance Area
Email: ETRAHAN@CBA.NEU.EDU
Auth-Page: http://ssrn.com/author=177830
Full Text: http://ssrn.com/abstract=888180
ABSTRACT: We study the effect of labor-friendly corporate
practices on shareholder outcomes using firms selected by Fortune
magazine as the "Best 100 Companies to Work for in America" over
1998-2004. We find that investors react positively to the list's
announcement and that list firms subsequently outperform a size-
and industry-matched control group on productivity,
profitability, and value creation. Human capital dependent firms
are more likely to make the list and the benefits of improved
performance accrue mostly to such firms. Our analysis of excess
executive compensation and forced turnover suggests that top
management derives no pecuniary benefits from labor-friendly
practices. We therefore interpret our results as consistent with
rational choice, noting that the benefits of devoting significant
resources to employee welfare appear to outweigh the costs,
especially for firms that depend more on human capital.
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"Performance Measure Properties and the Effects of Incentive
Contracts"
Author: JAN BOUWENS
Tilburg University - CentER and
Faculty of Economics and Business Administration
Email: j.bouwens@uvt.nl
Auth-Page: http://ssrn.com/author=80126
Contact: LAURENCE VAN LENT
Tilburg University - Department of
Accounting
Email: vanlent@uvt.nl
Auth-Page: http://ssrn.com/author=329350
Full Text: http://ssrn.com/abstract=903186
ABSTRACT: Using data from a third-party survey on compensation
practices among Chief Executive Officers, we show that less noisy
or distorted performance measures and higher cash bonuses are
associated with better-directed effort and improved employee
selection. Specifically, 1) an increase in the cash bonus
increases the selection functioning of incentive contracts, but
does not directly affect the effort that employees deliver, and
2) performance measure properties directly impact both effort and
the selection functioning of incentive contracts. These results
hold after controlling for an array of incentive contract design
characteristics and for differences in organizational context.
Our estimation procedures address several known problems with
using secondary datasets.