(2) percentage of total compensation that
is equity-based, and (3) percentage of total compensation in salary plus bonus.
Total compensation is the sum of the dollar values of salary, bonus, dividend
units, saving plans, properties, insu...(2) percentage of total compensation that
is equity-based, and (3) percentage of total compensation in salary plus bonus.
Total compensation is the sum of the dollar values of salary, bonus, dividend
units, saving plans, properties, insurance, and the value of the awards from
grants of new stock options, phantom stocks, restricted stocks, performance
shares, and performance units. The percentage of total compensation that is
equity-based is measured as the ratio of the sum of the value of awards from
grants of new stock options, restricted stocks, phantom stocks, and performance
shares to total compensation. Finally, the cash percentage of total compensation
is the ratio of salary plus bonus to total compensation.
In analyzing the effect of compensation structure on firm performance, I only
considered expected rather than realized compensation. Thus, the measurement
of stock options exclude the change in the value of the accrued stock of
outstanding options during the sample period. The reason is that there is
a mechanical relation between firm performance and realized executives’ wealth.
As an example, consider two firms that pay salaries of $X and that made
a one-time-only stock option grant of 1,000 shares several years ago (with no
subsequent grants). Suppose one of these firms turns out to be a high performer,
while the other one is low performer. The low-performing firm will have a zero
realized option value, while the high performer (with high appreciation) will
have a large realized option value. Thus, a regression of firm performance on
realized stock options will yield a positive mechanical correlation, and will not
allow inferences about the effectiveness of stock options. Measurement of
compensation is discussed further in the appendix.
Ownership structure: The percentage of equity held by managers is measured
using the sum of their direct share ownership and their stock options outstanding
plus share ownership by their immediate families. The percentage of equity
held by all outside blockholders is measured using the sum of the percentages of
equity held by individual investors, institutional investors, and corporations
who own at least 5% of the common stock of the company. I choose 5% (as
many researchers do) because this ownnership level triggers mandatory public
filing under SEC regulation.展开 |
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