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The effect of SFAS No. 123(R)on executive incentive pay

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Purpose – Until 2005, corporations could choose whether to expense incentive options or to disclose
the value in the financial footnotes. During 2004, however, the Financial Accounting Standards Board
adopted the revised Statement No. 123, which requires public corporations to measure the cost of stock
options on grant-date and expense that cost over the vesting period of the grant. This study investigates
the impact of SFAS 123(R) on the type of executive incentive pay-option versus restricted stock.
Design/methodology/approach – Comprehensive compensation data was collected from Standard
& Poors ExecuComp data base for the period 2002-2006 for two industries identified by SIC codes 73
(business services) and 35 (electronics). The study tracks the percentage of pay in the form of incentive
stock options or restrictive stock grants before and after SFAS No. 123(R) was adopted in 2004. A series
of multivariate regression models test whether the restricted stock percentage of total compensation
can be partially explained by the adoption of SFAS 123(R).
Findings – The results show that the average fair value of stock awards is higher and the average
fair value of option awards is lower after 2004. In addition, after 2004, stock compensation as a
percentage of total pay is positively related to stock price volatility. The data also suggest that those
companies substituting restricted stock for options actually increase total incentive pay.
Social implications – The study’s findings may suggest that those companies substituting
restricted stock for options increase total executive pay. This would be a side effect from the adoption
of SFAS 123(R), in that most companies use the Black-Scholes model to value executive options. Given
the long life of these options and the high volatility in certain industries the option value is quite high.
Therefore, the amount of substituted restricted stock is also inflated.
Originality/value – The adoption of SFAS 123(R) was highly contested by executives in industries
with high stock price volatility. The authors document that, in the case of two industries, executive
incentive pay structure was affected.

Keywords United States of America, Accounting, Compensation, Stock options,Executive compensation, Incentive stock options, Restricted stock grants,SFAS 123(R) Accounting for Stock-Based Compensation

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Informasi Detail

Judul Seri

International Journal of Accounting and Information Management

No. Panggil

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Penerbit

: Emerald Group., 2012

Deskripsi Fisik

International Journal of Accounting and Information Management Vol. 20 No. 3, 2012 pp. 282-299

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

AKUNTANSI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

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