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The purpose of this paper is to examine the relationship of CEO compensation plans and the risk of managerial equity portfolios with the extent of strategic investments in advertising, capital expenditures and research and development (R&D). The elements of compensation are salary, bonuses, options and restricted stock grants. The authors proxy the design of CEO equity portfolios by the price performance sensitivity of the holdings and the portfolio deltas.

The authors use the components of executive compensation and portfolio risk as the dependent variables, regressing these against measures for the level of strategic investment. The authors test for non-linear relationships between the components of CEO compensation and strategic investments. The sample is a broad cross-section from 1992 to 2016.

The authors find strong support for non-linear relationships of capital expenditures and R&D with CEO bonuses, option grants and restricted stock grants. There are very complex relationships between the components of executive compensation and R&D expenditures, but little evidence of a relationship with advertising expenditures. The authors also find strong complex relationships in the design of CEO equity portfolios with advertising and R&D.

Little earlier research has considered advertising, capital expenditures and R&D in a unified framework. Also, testing for non-linear associations provides much greater insight into the relationship between the components of executive compensation and strategic investment. The findings represent a valuable incremental contribution to the executive compensation literature. The results also have normative policy implications for compensation committees’ design of optimal annual CEO compensation packages to incentivize or discourage particular strategic investment behavior.

The paper aims to study the effect of tenure on the structure of CEO compensation. The relation between CEO compensation and CEO tenure provides a good testing bed for many effects: the managerial power effect, the portfolio consideration effect, the learning effect, and the career concern effect.

Tobit regressions were run of the percentage of equity‐based compensation on CEO tenure and the effect of tenure compared between inside CEOs and outside CEOs.

It was found that the percentage of equity‐based compensation increases during the early years of tenure for outside CEOs, and decreases during the later years of tenure for inside CEOs. Before they are tenured, outside CEOs have significantly higher and faster growing percentage of equity‐based compensation than inside CEOs. Furthermore, the portfolio consideration effect and the learning effect are the major effects in explaining the effect of tenure on the compensation structure.

The evidence that boards of directors take into account the CEOs’ holdings of equity incentives, the types of CEOs, and their years on tenure to adjust the structure of CEO compensation indicates that firms should, and do, try to optimize their CEO compensation structure on the basis of firm‐specific or CEO‐specific characteristics. It is suggested that there is no simple formulaic approach to governance reform.

The paper contributes to the literature by studying and explaining the different patterns of compensation structure over CEO tenure between inside CEOs and outside CEOs.

In late 2008, a crisis of unprecedented proportion unfolded on Wall Street that called for the government bailout of institutions. Although the crisis wreaked havoc on the lives of firm stakeholders and taxpayers, many of the executives of these rescued firms received bonus compensation as the year closed, which called into question the relationship between pay and performance. Equity compensation is viewed by many as the answer to the principal–agent dilemma. By giving an executive stock in the firm, as an owner, his interests will now be aligned with those of shareholders, and the executive will work to enhance firm performance. Equity compensation was on the rise during the 1990s when stock options became the largest component of executives’ compensation packages [Murphy, K. J. (1999). Executive compensation. Handbook of Labor Economics, 3, 2485–2563]. During the first decade of the new millennium, usage of restricted stock in compensation plans contributed to the executives’ total package. Whatever the form, equity compensation should induce managers to make decisions for the betterment of the firm.

Empirical evidence, however, has contradicted this ideal notion that mangers who are partial owners of the firm work to maximize firm value. Rather, managerial power in the form of earnings management and manipulation of insider information come to the forefront as a means by which executives can maximize the equity portion of their compensation packages. The Sarbanes–Oxley Act of 2002 as well as new accounting rules set forth by the Financial Accounting Standards Board may help to remedy some of the corporate ills that have surfaced in the past. This will not be possible, however, without compliance and increased corporate governance on the part of firms and their executives. Compensation committees must take great care in creating a compensation package that incites the executive to not only act in the best interest of his firm but also consider the welfare of the common good in his actions.

Purpose – This research studies how the discipline of option-like personal equity portfolio and the market discipline of debt jointly affect executive compensation design.

Design/methodology/approach – A theoretical model is proposed based on the moral hazard problem of Holmstrom and Milgrom (1987) by integrating firm financial leverage, executive equity holding, and profit-sharing rule. Subsequently, a panel data set of executive compensation is analyzed to provide empirical evidence.

Findings – The discipline of option reduces the need of performance-based compensation. The discipline of debt reduces the use of incentive pay for lowly leveraged firms, but increases the use of incentive pay for highly leveraged firms. These two disciplines can be either complements or substitutes on affecting optimal contracts depending on firm leverage.

Research limitations/implications – The present study provides a starting point for further study of optimal compensation that is not only the conventional one of mainly aligning managerial interests with that of shareholders but also the one of reinforcing the joint discipline of debt and option.

Originality/value – This new perspective produces several results characterizing firms that the discipline of debt and the discipline of option can be either complements or substitutes on affecting incentive compensation design.

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings and meet earnings targets. We extend this research by examining the relationship between executive equity compensation and the opportunistic use of PRE by US MNCs, and the market reaction to earnings management using PRE designations. Firms use equity compensation to incentivize executives to strive for maximum shareholder wealth. One unintended consequence is that executives may engage in earnings management activities to increase their equity compensation. In this study, we examine whether the equity incentives of management are associated with an increased use of PRE. We predict and find strong evidence that the changes in PRE are positively associated with the portion of top managers' compensation that is tied to stock performance. In addition, we find this relationship to be strongest for firms that meet or beat forecasts, but only with the use of PRE to inflate income, suggesting that equity compensation incentivizes managers to opportunistically use PRE, especially to meet analyst forecasts.

Further, we provide evidence that investors react negatively to beating analysts' forecasts with the use of PRE, suggesting that investors find this behavior opportunistic and not fully convincing. This chapter makes an important contribution to what we know about the joint effects of tax policy, generally accepted accounting principles, and incentive compensation on the earnings reporting process.

We examined the relationship between employee equity compensation, incentive compensation, and firm growth using a sample of 480 privately held firms from the Ewing Marion Kauffman Foundation’s database of Ernst & Young Entrepreneur Of The Year (EOY) winners. Using frameworks from agency and motivation theories, we argued that larger percentages of both equity- and incentivebased compensation allocated to top managers and employees would be associated with firm growth. After controlling for firm and industry effects, the results of the study showed that while the firms in the sample preferred providing incentive compensation, providing equity compensation for employees was a positively significant predictor of firm growth over a three-year period. These findings suggest that prescriptions for growth in larger firms developed from agency theory also may be applicable to entrepreneurial firms, and founder/CEOs seeking to grow their firms should consider using equity compensation to motivate their current employees and to attract new ones.

The purpose of this paper is to examine the association between institutional investor ownership and the compensation of executives at US banks during the financial crisis period.

This paper uses a linear regression model to examine the association between institutional ownership and the level of executive compensation at US banks.

Institutional investors influence executive compensation at banks with the impact being most pronounced for the CEO. Ownership by the top five investors is associated with greater total compensation. Active investors have the strongest impact on executive compensation as evidenced by a positive association between active ownership and both equity compensation and total compensation. As well, active ownership is negatively associated with bonus compensation. The paper also finds that passive and grey investors influence compensation but to a less significant extent than active investors.

The results suggest that the monitoring role of active and passive institutional investors is different in the banking industry. As well, institutional investors were likely a driving factor in shaping the compensation packages of the top executive team during the financial crisis period.

Stakeholders at banks should be aware that not all types of institutional investors act as effective monitors over issues such as controlling the amount of executive compensation paid to the highest paid executive, the CEO. Prospective investors should consider the type of institutional investor that owns large blocks of equity when making an investment decision. Namely, the interests of existing institutional investors may differ from their own interests.

This paper provides a new perspective on the monitoring roles played by different types of institutional investors. Furthermore, it provides a more comprehensive analysis by investigating the role of institutional investors in shaping the compensation packages of CEOs and other top executives including chief financial officers (CFOs) who play a vital role in risk management at banks.

The present study investigates the impact of accounting comparability on chief executive officer (CEO) incentive plans and the moderating role of board independence for companies listed in Tehran Stock Exchange (TSE).

The information about 177 companies in 2014–2021 was examined. In this study, equity-based compensation and cash-based compensation were used as the CEO incentive plans. The equity-based compensation was calculated through the ownership of the CEO shares.

The results suggest that the higher accounting comparability increases not only CEO equity-based compensation, but also cash-based compensation. Board independence also strengthens the relationship between accounting comparability and CEO compensation. Hypothesis testing based on robustness checks confirmed these results.

The paper is pioneering, to the authors' knowledge, in identifying how board independence moderates the impact of accounting comparability on CEO compensation. The findings provide insights into economic consequences to the firm related to accounting comparability and board monitoring. The results have important practical implications for international investors to evaluate accounting comparability, corporate governance mechanisms and CEO incentives.

The purpose of this paper is to investigate the effect of cross-listing on the size and structure of director compensation at individual director level. While much of the prior literature has focused on executive compensation, more recent literature has started to examine director compensation. Additionally, there has been extensive literature examining the impact of cross-listing on the corporate governance and equity valuation of listed firms. The literature, however, has largely ignored the effect of cross-listing on director compensation schemes. This study attempts to combine these two literature streams and examine the effect of cross-listing on director compensation.

This study uses American Depository Receipts (ADRs) and matched non-ADRs from the same country and industry to test the relationship between cross-listing and director compensation. Regressions with country, year and industry fixed-effects are employed. The relationship is further examined using only ADR firms during pre-listing and post-listing periods.

This study finds that directors of ADR firms receive higher total compensation and greater percentage equity-based compensation relative to directors of non-ADR firms. This study also finds that such differences in director compensation are dependent on the cross-listing program a firm is registered to. Directors of ADR firms also receive higher total compensation and greater percentage equity-based compensation during post-listing periods relative to their own compensation during pre-listing periods.

This study extends the literature on director compensation in a global setting, and is the first to examine an unanswered question regarding the effect of cross-listing on director compensation. This study provides important information that cross-listing affects the size and structure of director compensation between ADR and non-ADR firms, as well as between pre-listing and post-listing periods for ADR firms themselves.

The purpose of this paper is to investigate the way in which CEOs are shielded or rewarded for incurring R&D expenses. Strategic expenses such as R&D yield returns over a long period of time even though GAAP requires them to be written off in the period they are incurred. Going beyond the existing shielding paradigm, the paper investigates whether compensation committees actively reward CEOs for incurring strategic expenses.

The paper uses empirical analysis by using regression analysis with CEO compensation (both cash and equity) as the dependent variable and firm size, firm performance, earnings risk, market‐to‐book ratio, R&D expenses, advertising expenses and governance variables as control, independent and test variables.

The paper shows that CEOs are not only shielded but are actively rewarded for incurring R&D expenses. The paper also shows that the shield/reward effects are stronger in manufacturing firms. Finally, the paper shows that independent compensation committees increase rewards for R&D expenses.

Given the small sample of firms with advertising expense data, a larger sample, possibly using hand‐collected data will be required to arrive at definitive conclusions regarding shielding/rewarding for advertising. Furthermore, the shielding of both R&D and advertising expenses should be looked at in conjunction with the duration of the persistence of benefits of such strategic expenses.

This paper shows how compensation committees can use compensation to induce executives to undertake strategic expenses on behalf of the firm.