Journal of Business & Financial Affairs

Discuss Whether Incentive Executive Compensation Poses Governance Issues

Abstract

Abbott Haron

Executive compensation structures (joined with bank accounting regulations) encouraged the delivery of misleading information booking income “above the line,” however retaining liabilities off the balance sheet. Executives paid with stock options are motivated to increase the market value of shares, and this may be more simply done by increasing reported income than by increasing true profits. Though Sarbanes-Oxley fixed some of the problems that were uncovered in the Enron and associated scandals, it did nothing about stock options. With stock options not being expensed, shareholders frequently were not fully apprised of their cost. This provides durable incentives to pay exorbitant compensation through stock options. However, the use of stock options emboldens bad accounting practices