Stock and compensation

Article Abstract:

Compensation planning within firms creates important corporate financial problems. Theoretical models and empirical tests of hypotheses in this area should play a much larger role than currently in the modern theory of corporate finance. Employees fund a large proportion of their firm's activities through deferred compensation arrangements tied to the performance of their company. These arrangements are generally put in place for incentive reasons, to align the interests of employees more closely with those of shareholders. Moreover, tax rules encourage or discourage these arrangements at various times. Currently, both tax rules and incentive considerations encourage stock buyback programs to fund deferred compensation arrangements. Prior to the 1980s, however, tax rules favored funding in other than company stock, implying that employees likely held company stock for incentive and not for tax reasons during this time period. (Reprinted by permission of the publisher.)

Methods, Taxation, Compensation management, Employee stock ownership plans, transcript, Incentive stock options, Scholes, Myron S.

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Agency costs, risk management, and capital structure

Article Abstract:

The joint determination of capital structure and investment risk is examined. Optimal cost structure reflects both the tax advantages of debt less default costs (Modigliani and Miller (1958, 1963)), and the agency costs resulting from asset substitution (Jensen and Meckling (1976)). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is small for the range of environments considered. Risk management is also examined. Hedging permits greater leverage. Even when a firm cannot precommit to hedging, it will still do so. Surprisingly, hedging benefits often are greater when agency costs are low. (Reprinted by permission of the publisher.)

Asset & Risk Management, Debt & Capital Management, Research, Risk management, Capital investments, Financial management, Transcript, Agency theory, Leland, Hayne E.

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Agency, Delayed Compensation, and the Structure of Executive Remuneration

Article Abstract:

The structure of executive compensation programs is examined as is the role of delayed compensation in holding executives. Compensation packages must be designed to take into consideration mismanagement, risk pressures on management, and willingness to bear risk Older executives prefer safe delayed compensation packages. Younger executives prefer stock options. Optimal programs are designed to follow corporate and personnel needs.

Compensation and benefits, Management, Executives, Executive compensation

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