CEO compensation: a question of ethics

Abstract

The outrageous corporate accounting and fraud scandals in the past years have all but demolished investors' faith in our accounting framework. One big area of concern is executive compensation. In 1992, Congress enacted section 162(m) of the Internal Revenue Code, which limited executive compensation that is deductible to one million dollars a year. As an alternative, stock option plans have gained popularity. The reporting for these plans is very controversial however, as different methods produce vastly different expenses, both in size and timing. Another concern of many investors is earnings management, the concept of timing revenues and expenses in order to steady and inflate earnings. This has many implications within executive reporting as the method chosen can greatly affect compensation expense, both in size and consistency, and thus manage earnings. This paper will focus on both deontological and teleological ethical models in order to show the inherent inconsistencies contained within the intrinsic method of option reporting. The study also demonstrates ethical standards already existing within the accounting field which are irreconcilable with the intrinsic method of reporting. Both teleological and deontological models are used to demonstrate the current required method's shortfalls and prove the fair value method does not in fact violate the principles.