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Executive Incentives/Dr. Heba Ajlouni
Executive Incentives/Dr. Heba Ajlouni
Chapter overview
Potential Managerial Temptations Types of Executive Compensation Does Incentive-based Compensation Work in General? Potential Incentive Problems with Incentive-based Compensation Other Compensation Crime and Punishment International Perspective-CEO Compensation Around the World
Stock Option
Options and Accounting
Stock options favorable tax treatment for both the executive and the company Accounting cost and economic cost FAS 123(R)
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Real-World Examples
Disney CEO Michael Eisner Stock options create the possibility that only short-term value will be created, not long-term value Managements Behavior at Xerox Managers may manipulate accounting profits
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50 40 30 20 10
period of phony profits
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Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01
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Jan-02
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Other Compensation
Club membership, financial advisors, luxury cars and chauffeurs, personal travel, etc. Retirement compensation Company loan
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China-Hong Kong China-Shanghai France Germany India Italy Japan Mexico Netherlands Singapore South Korea Spain Sweden Switzerland Taiwan United Kingdom United States Venezuela
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Percent of Total Pay
100% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0%
Fixed Pay
Argentina Australia Belgium Brazil Canada
Perquisites
Variable Pay
Summary
Stock and option incentives are believed to solve agency-problem However, whether or not the incentives work results in much debate If incentive compensation is imperfect, then monitors are needed.
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