Is there a dark side to incentive compensation?

Corporate Fraud and Managers’ Behavior: Evidence from the Press

“…Interestingly, as shown in the last part of Table II (Efendi et al, 2007) or securities fraud allegations (Denis et al, 2006). In the same vein, Cheng and Warfield (2005) found that corporate managers with equity incentives engage more frequently in earnings management and Bergstresser and Philippon (2006) document that earnings management is more pronounced at firms where the CEO's potential total compensation is more closely tied to the value of stock and option holdings.…”

Does Stakeholder Management have a Dark Side?

“…Heavy use of stock-based compensation may induce managers to take more optimal risk when expecting sure losses in their underlying stock value (Deyà-Tortella et al, 2005) and manipulate accounting figures (Zangh et al, 2008). Prior studies (Denis et al, 2006;O'Connor et al, 2006) find a direct association between large option-based managerial pay and the likelihood of fraud allegations, concluding that there is a dark side to incentive compensation. This point is stressed by Zangh et al, who state that such incentive ''may not always be effective in aligning the interests of CEOs and stakeholders.…”

Underpaid and Corrupt Executives in China’s State Sector

“…For example, Benmelch et al (2010) develop a model in which stock-based compensation induces managers to conceal bad news and take on suboptimal investment policies to support this fraudulent behavior. Closely related to this, a number of studies have identified a significant relationship between equity-based compensation and different forms of corporate and securities fraud allegations (e.g., Burns and Kedia 2006;Denis et al 2006;Peng and Röell 2008;Johnson et al 2009). We add to this literature by showing that executive compensation is related to fraud allegations in the state sector in a large transition economy.…”