Jae Bum Kim: A Tool for Shareholders

Shareholders have a powerful tool in their arsenal for making sure the folks in the C-suite stay motivated—compensation packages, says Jae Bum Kim, assistant professor of accounting.

Although that may seem obvious, keep in mind that Kim is talking about more than the number of zeros on a paycheck. He has been studying how the length of time it takes managers’ annual compensation to vest impacts the disclosure of “bad news” earnings forecasts.

In the past, it made sense to assume that managers would do a better job on behalf of shareholders if their ultimate financial reward was going to happen further down the road. Call it an educated hunch. Now, research by Kim and two former colleagues from Singapore Management University backs that up.

“While regulators and academic researchers have been proposing that managers’ compensation should be long-term-oriented as a way of solving managers’ myopic, value-destroying behaviors, there has not been much evidence on this issue,” explains Kim. “A new finding from this study is that long pay duration [such as a longer horizon of equity-based compensation] can motivate managers to enhance their voluntary disclosures, particularly those of bad news.”

Kim says the biggest challenge in developing the study was ensuring that other factors that influence the design of a manager’s compensation package weren’t the cause of the manager’s disclosure choice.

“Sometimes the board of directors has specific factors in mind when they design executive compensation, and these underlying factors could be related to managers’ disclosure choices in some way,” Kim explains. “We had to ensure that this was not the case in order to argue that it is in fact long pay duration that leads to managers’ disclosure behaviors, not the other underlying factors.”

There is a clear takeaway from the research for business leaders or investors, Kim says. “The CEO compensation contract should be designed in a way to help managers work in the interest of shareholders,” Kim explains. “And one way of doing so is to offer the CEO a long duration pay contract. But, there are costs as well.

By considering both benefits and costs for certain types of compensation contracts, an individual firm can arrive at its compensation contract.”

The study suggests that one benefit of long duration pay is to induce managers to share more information with shareholders so that shareholders make better decisions.

Kim, who primarily teaches courses in financial accounting, has always been interested in the role of accounting information on capital market participants’ behavior and the role of various incentives that affect people’s decisions related to accounting information. In the future, he is interested in looking at other market players such as institutions and analysts.

Story by: Jennifer Marangos

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