Financial Accounting Blog

Wednesday, June 23, 2004

Executive Compensation. has an excellent article from 2003 that addresses various reasons why companies are changing the way they are compensating employees. The article's principle focus is on how these changes affect executive compensation. Part of this article focuses on the logic behind reducing the use of stock options as compensation in an effort to encourage executives to focus on results rather than stock price. The second part of the article says that companies are adopting this model because stock options may soon been viewed as an expense for all employees (as proposed by FASB).
Granted, CFO bonuses may have surged because companies booked more profit last year. But the rise in short-term incentive pay could also mean that the interests of corporate executives and shareholders are finally synching up.

Either way, CFO compensation is likely to be less dependent on stock options in coming years — even if the stock market hits a good stretch. Recent financial scandals have tainted the granting of lavish stock options to senior managers, and powerful institutional investors are now demanding that companies devise different ways to provide incentives to managers.