Reexamination of executive compensation with an emphasis on the effects of employee stock option costs and R&D expenditures

Abstract

This study analyzes the determinants of CEO compensation with an emphasis on the effects of employee stock option costs and R&D expenditures. I examine the effects of these two items because firm performance as measured by reported accounting profits could contain important errors if these two items are not carefully taken into account. Moreover, this study may help inform how firms internally view these two controversial accounting items. I obtain two major results. First, employee stock option costs negatively affect CEO cash compensation and total compensation, suggesting that firms treat employee stock options as an expense internally. I also find that R&D expenditures do not significantly affect CEO compensation in the current year. The result is consistent with the explanation that firms do not regard R&D expenditures as an expense but as an asset.