Amin Mawani

Executive stock options and dynamic risk‐taking incentives

Purpose - The purpose of this study is to present theory and empirical evidence on whether changes in leverage are systematically associated with changes in the CEOs risk incentives over time.

Taxes and Compensation

Tax planning can potentially offer a win-win situation for both the employee and the employer since not all forms of compensation are treated in the same manner for tax purposes. This chapter illustrates that compensation planning cannot be done in isolation from tax planning, and tax planning cannot be done in isolation from compensation planning. To appreciate the role of taxes in compensation planning, it is important to consider the tax consequences to both the employee and the employer since taxes can affect both the form and the amount of total compensation paid to employees.

Impact of Societal Trust on CEO Compensation

We examine the association between societal trust and the levels of CEO compensation and the proportion of equity-based compensation of 1,892 firm-years from 22 countries over the 2007-2013 period. We find both the levels of CEO compensation as well as the proportion of equity-based compensation to be lower in countries with higher levels of societal trust. This suggests that costly regulations on CEO compensation may not be as necessary in jurisdictions with higher levels of societal trust. We also examine the association between pay disparity and societal trust. Consistent with our finding of lower pay at the CEO rank, we find pay disparities are lower in countries with higher levels of societal trust.

Executive Option Plans and Incentives to Take Risk in Levered Firms: Equity Value or Firm Value Maximisation?

Financial leverage does not distort investment decisions if executives are paid to maximise total firm value rather than equity value. Existing models of this idea imply that stock-based incentives should be negatively related to firm leverage, a prediction that has little empirical support. We show that the risk distortions induced by financial leverage can be overcome without diluting effort incentives by adjusting the exercise price of executive stock options. We also show that the necessary adjustments are similar to the common practice of granting options at-the-money. We then empirically examine the risk incentives of executive stock option plans in a large sample of Canadian firms. The evidence consistently supports the hypothesis that executive stock options mitigate the risk-taking incentives of shareholders in levered firms.