Executive Compensation: Accounting and Economic Issues
Gary A. Giroux · 2007
A concise accounting-and-economics guide to how, why, and how much top corporate executives are paid—covering pay components, accounting treatment, disclosure, history, economic theory, and international comparisons.
Executive Compensation: Accounting and Economic Issues demystifies one of the most contentious topics in corporate governance—how CEOs and their teams are paid. Written by a veteran accounting professor, it explains the composition and objectives of pay contracts, walks through the actual calculations, journal entries, and SEC disclosures required for salary, bonuses, stock options, restricted stock, SARs, and pensions, and situates all of it within an 80-year historical arc shaped by regulation and unintended consequences. Grounded in agency theory and empirical research (efficient contracting vs. managerial power), the book shows why pay exploded in the 1990s via stock options, how it moderated after the tech crash and subprime meltdown, and how U.S. pay compares to other countries. Above all, it argues that performance-based compensation—while designed to align executives with shareholders—remains the leading incentive structure driving short-term financial focus and potential accounting manipulation. It is a valuable supplement for accounting, finance, and governance courses and for professionals, board members, and policymakers.
The model it argues
A causal framework in which design levers (pay mix and equity-based/performance pay), governance conditions, and regulatory/tax context shape executive psychological/behavioral states (incentive alignment vs. manipulation incentives), which in turn drive outcomes such as accounting manipulation, firm performance, and pay levels. Grounded in the book's agency-theory framing and historical/empirical analysis.
Key ideas
- Performance-Based Pay Design
- The proportion and structure of executive compensation that is contingent on measured performance (earnings, stock price) and delivered largely through equity-based instruments rather than fixed salary and benefits.
- Equity/Option Intensity
- The degree to which a firm relies on stock options and equity grants, capturing dilution potential and one-directional payoff exposure of executives.
- Regulatory and Tax Context
- The set of tax rates, accounting standards, and regulatory rules that alter the relative attractiveness of compensation forms and shape firm pay choices, often with unintended consequences.
- Disclosure and Transparency
- The scope, granularity, and public availability of executive pay information enabling external monitoring and benchmarking.
- Board Independence vs. Managerial Power
- The extent to which pay is set by an independent monitoring board versus captured by a powerful CEO who extracts rents.
- Incentive Alignment
- The degree to which executives' personal financial outcomes move with shareholder wealth, motivating value-increasing behavior under efficient contracting.
- Manipulation and Short-Termism Incentive
- The latent pressure created by large equity/option exposure to prioritize meeting short-term earnings/stock targets through manipulation over long-term value.
- Accounting Manipulation Outcome
- Observed misstatement, aggressive accounting, or fraud in financial reporting resulting from misaligned incentives.