Phantom stock

Abstract: Considering the growing criticism of large executive compensation packages in the popular press, further discussion of the effectiveness of compensation plans in general is timely and relevant. Recently, compensation consultants and academics have argued against the use of accounting-based compensation. [1] In a survey of top level executives and compensation consultants, Rich and Larson (1984) found dissatisfaction with accounting-based incentive plans because these plans do not target "appropriate" variables. Still, compensation plans based on accounting-based performance goals make up a large share of executive remuneration, and are used by a large proportion of firms. Studies conducted by Murphy (1985) show that, on average, salary plus bonus make up 80% of executive compensation. Also, about 35% of firms surveyed by the Conference Board use long-term accounting-based performance plans (The Conference Board, 1995, 1996). So, why do firms continue to use accounting-based compensation plans? The goal of this study is to examine whether long-term accounting-based compensation plans (also called performance plans) actually contribute to future performance improvements. Our sample consists of 175 firms that adopted long-term performance plans between 1971 and 1980. Based on prior research, we focused on two specific accounting variables that these contracts tend to target--earnings per share growth and return on equity. We use an industry-based benchmark to evaluate these contract target variables. We find that in the years prior to plan adoption, firms generally perform at or below the industry median level, and following plan adoption, the adopting firm's contract target variables are significantly higher than the industry median. To examine whether the performance changes are driven by efficiency improvements rather than risk shifting or earnings manipulation, we test for changes in asset risk and operating returns, an efficiency variable that is difficult to manipulate. We find that the performance improvements do not appear to be driven by risk shifting or earnings manipulation. In addition, the performance improvements do not appear to be driven by the stock-based components that some of these plans contain. The findings are consistent with the hypothesis that accounting-based incentive compensation effectively aligns the interests of the shareholders and management. The review of typical performance plans (below) sets the stage for the research. This is followed by the sample description and research methodology. The analyses and the results that follow lead to the conclusions with implications for research and practice. REVIEW OF PERFORMANCE PLANS Executive compensation plans can be classified according to the type of performance variables that these plans target. The first group is the stock Price-based plans, which include compensation components such as stock options, stock appreciation rights, phantom stock, stock dividend units, and restricted stock. The second group is comprised of the accounting performance-based plans, which include compensation components such as annual salary adjustments, yearly bonuses, and long-term performance plans. While some salary and bonus plans may be somewhat arbitrary (possibly based on both stock price and accounting variables), performance plans explicitly target specific accounting measures of performance over a specified time period. The performance plan award period generally ranges from three to six years. Performance plans are of two types, depending on how the executive earns the reward, which is either in cash ("performance unit plans") or in shares ("performance share plans"). Under a performance unit plan, at the beginning of the award period a given number of units with a fixed dollar value for each unit are reserved for each executive. At the end of the award period the executive's remuneration is the number of units actually earned and awarded times the predetermined dollar value per unit. …

Abstract: Private companies are very differnt in certain aspects from theri public ounterparts. IN additon to fewer regulatory and disclouser requirements, they also have very distinct goverance, culturea, and mangament system characteristics, which results in very difernt compensation practice. One primary distinction highlighted in a recent Willam M. Mercer survery is praivte companies's conseratives use of long-term incentives. This is partly because tyical public company long-term incentiv vehicles, such as stock option and resturcted stock, often do not work as well in a private company setting. As alternatives, private companies have traditionally relied upon perfonace units and phantom stock plans for ther long-term incentives programs. These plans designs, however have major deficiencies. Consequently, two emerging long-term incentive approaches, value added plan designs and incentives based on econmic value management, may be ore appropriate for private companies.

Abstract: Phantom equity incentive in enterprises can be mainly divided into two modes: pay-through phantom equity and pure phantom equity The main difference is whether the incentive object needs actual investment and whether they have phantom stock option This research makes a comparative study on pay-through phantom equity and pure phantom equity, and designs a practical incentive mode of pay-through phantom equity

Abstract: The objective of this research is to test the granting of stock options as part of CEO compensation to earnings quality. Agency theory posits a conflict between the CEO's own self-interest and that of the owners who seek to maximize the long-term value of their investment. To avoid this conflict, compensation should align and bond these parties.The authors acquired the data from CompuStat and ExecuComp databases spanning the years of 2000 through 2009. The Dechow and Dichev (2002) model provides the earnings quality model for this study using the change in working capital with the error terms serving as the residuals. The hypothesis uses earnings quality as a proxy for management choices and as the predictive power of accruals. The first hypothesis indicated granting of CEO stock options has a positive association to earnings quality.Keywords: CEO compensation, stock option grants, incentive alignment, agency theory, and earnings qualityIntroductionDue to the increased scrutiny on Chief Executive Officer (CEO) compensation and earnings, the stock options of CEOs is coming under additional accounting scrutiny with the Financial Accounting Standards Board (FASB) issuing Statement of Financial Accounting Standards (SFAS) 123 (R). CEOs receive large amounts of compensation in the form of stock options, even if the company is not making earnings targets. Does the granting of CEO stock options affect earnings quality?Agency theory has been the primary foundation for research in the relationship between firm performance and executive compensation. The compensation committee develops the compensation structure to converge the motivations of the shareholders and their agents avoiding the agency theory conflict of interest (Jensen & Meckling, 1976; Tosi, Werner, Katz, & Gomez-Mejia, 2000).This study provides further empirical evidence of the association of granting stock options as part of the CEO compensation plan and earning quality. The more precise the earnings quality of the organization, the more indicative of future cash flows of the firm.Question 1: Is there a positive relationship between granting CEO stock options and earnings quality?CEO CompensationCompensation plans are the payments firm owners make to executives who manage the business. CEO's compensation is comprised of salary, bonus, stock options, restricted stock, and other long-term incentives (Cheng & Farber, 2008). CEO salary and bonus represent a major proportion of the total compensation (Benston, 1985; Lambert & Larcker, 1987). The supplementary major components of compensation other than salary and bonus primarily represent compensation related to long-term performance measures or deferred compensation not explicitly linked to firm valuation. Stock options, stock appreciation rights (SARs), performance units and shares, restricted stock, and phantom stock provide for compensation based on a firm's valuation over several years (Kumar, Ghicas, & Pastena, 1993). Hence, a review of the equity compensation of CEOs provides a different variation of a long-term focus.Agency TheoryAgency theory is the most basic agency structure, composed of two parties: a principal, who is the owner; and an agent (Holmstrom, 1979). The principal (owner) supplies the capital to the firm, while the agent provides the labor, which may involve effort as well as other decisionmaking responsibilities (Lambert, Larcker, & Weigelt, 1993). Agency theory is the study of the inevitable conflicts of interest that occur when individuals engage in cooperative behavior, which fundamentally changed corporate finance and organization theory, but it has yet to substantially affect research on capital-budgeting procedures (Jensen, 1993).Earnings QualityEarnings are high quality if earnings are persistent, an attribute based solely on the time series properties of earnings. Some define earnings as high quality if earnings accurately represent the economic implications of underlying transactions and events. …