When a well-known compensation consulting firm predicted in early April that new accounting rules wouldn't have any impact on the use of options as compensation for corporate executives, Wharton accounting professor Mary Ellen Carter was ready to disagree. "That's just not true," she says. "Options will be cut and directors will be switching to restricted stock for executive compensation."
Carter's response is the result of her research into the role of accounting in the design of CEO equity compensation, specifically as it relates to the use of options and restricted stock. Her study coincides with a ruling, implemented this year by the Financial Accounting Standards Board (FASB), requiring all firms to expense the value of employee stock options. Specifically, Carter looks at the accounting practices of 1,500 firms from 1995 to 2001, before many large companies began expensing stock options but during the years when the FASB began pushing the reform. Carter corroborates the findings of her study by examining changes in CEO compensation within firms that voluntarily began to expense options in 2002 and 2003.
In a new paper on this topic entitled, "The Role of Accounting in the Design of CEO Equity Compensation," Carter concludes that CEO compensation will change now that companies are required to subtract the expense of stock options from their earnings, just as they are required to account for salaries and other costs. And Carter predicts that as a result, firms will switch from options to restricted stock as a preferred compensation option.
"By eliminating the financial reporting benefits of stock options, firms expensing stock options no longer have an ability to avoid recording expenses with any form of equity compensation," writes Carter, who authored the study with Luann J. Lynch, a professor at the Darden Graduate School of Business Administration, and Wharton accounting professor [continue]
Page 1 of 8
> >>