stock option repricing and its alternatives an empirical examination in this paper i examine the likelihood of ceo stock option repricing and its alternatives namely option grant stock grant and do nothing multinomial logit results suggest that firms reprice options to increase sensitivity of pay to stock price and to temper down sensitivity of pay to volatility moreover repricing firms are younger and more concentrated in industries where human capital is important finally i find no evidence that internal governance or executive conflicts of interest are relevant in explaining repricing my results indicate that repricing is motivated by incentive alignment and retention and not by agency cost considerations

ironing out the kinks in executive compensation linking incentive pay to average stock prices abstract traditional stock option grant is the most common form of incentive pay in executive compensation applying a principal agent analysis we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices among other benefits averaging reduces volatility by about 42 making the incentive pay more attractive to risk averse executives holding the cost of the option grant to the firm constant asian stock options are more cost effective than traditional stock options and provide stronger incentives to increase stock price more importantly the improvement is achieved with little impact on the option grant s risk incentives after adjusting for option cost finally averaging also improves the value and incentive effects of indexed stock options

two interval inventory allocation policies in a one warehouse n identical retailer distribution system for a system of n identical retailers we construct a model for determining warehouse inventory allocation policies which minimize system lost sales per retailer between system replenishments an allocation policy is specified by a the number of withdrawals from warehouse stock b the intervals between successive withdrawals c the quantity of stock to be withdrawn from the warehouse in each interval and d the division of withdrawn stock among the retailers we show that in the case of two withdrawals available stock in each interval should be divided to balance retailer inventories we also develop an infinite retailer model and use it to determine two interval allocation heuristics for n retailer systems simulation tests suggest that the infinite retailer heuristic policies are near optimal for as few as two retailers simulation tests indicate that the risk pooling benefits of allocation policies with two well chosen intervals are comparable to those of base stock policies with four equal intervals

the dating game do managers designate option grant dates to increase their compensation we provide evidence of two variants of a dating game that entails picking a grant date ex post that is after the board s compensation decision is made back dating picking a date before the board decision date and forward dating waiting after the board decision date to observe the stock price behavior consistent with back dating we find stock return behavior around the grant date to be positively related to reporting lag in the promptly reported sample we find stock return behavior and the pattern of reporting lags consistent with forward dating our calculations show that managers can obtain economically significant benefits by playing the dating game

using auctions to price employee stock options the case of zions bancorporation esoars the first empirical analysis of zions bancorporation s 2006 and 2007 auctions of employee stock option appreciation rights securities esoars this study examined 1 the impact of auction rules on bidding strategies and allocations 2 the efficiency of the auction clearing prices and 3 the value gap between esoars auction clearing prices and various model based estimates it found that the design features of the auctions e g ending rules significantly affected bidding strategies but not final allocations which remained highly concentrated it also found that the clearing prices 1 displayed high price elasticities of demand suggesting efficient price discovery and 2 were low relative to some but not all model based estimates these findings suggest design improvements that might benefit auctions of other illiquid derivatives e g banks troubled assets currently being considered by the u s government

trades unions market concentration and income distribution in united states manufacturing industry this paper uses three and four digit cross sections of united states manufacturing industries in 1972 in order to test a kaleckian degree of monopoly theory of income distribution various measures of labour share are regressed on the four firm concentration ratio the advertising sales ratio a measure of capital intensity and a unionisation variable in contrast to earlier studies for the u s strong evidence is found of a negative relationship between in particular production worker wage share and concentration and advertising intensity and evidence of a positive relationship between wage share and the level of unionisation

optimal asset allocation and risk shifting in money management this article investigates a fund manager s risk taking incentives induced by an increasing and convex relationship of fund flows to relative performance in a dynamic portfolio choice framework we show that the ensuing convexities in the manager s objective give rise to a finite risk shifting range over which she gambles to finish ahead of her benchmark such gambling entails either an increase or a decrease in the volatility of the manager s portfolio depending on her risk tolerance in the latter case the manager reduces her holdings of the risky asset despite its positive risk premium our empirical analysis lends support to the novel predictions of the model

valuing employee stock options does the model matter in this numerical analysis of models for valuing employee stock options the focus is on the impact of a model on the resulting option prices and the sensitivity of pricing differences between models with respect to changes in the parameters for most models the price reduction relative to standard options is uniquely determined by the expected life of the option in fact with the exception of the financial accounting standards board 123 model pricing differences are negligible if the models are calibrated to the same expected life of the option consequently the application of models with several hard to estimate parameters such as the utility maximizing model can be greatly simplified by calibration because expected life is easier to estimate than utility parameters

bullwhip and batching an exploration the rounding of orders to achieve a batch size is recognised as a source of the bullwhip problem within supply chains while it is often advocated that batch sizes should be reduced as much as possible there has been limited investigation into the impact of batching on bullwhip here we consider scenarios where orders are placed only in multiples of a fixed batch size for both deterministic and stochastic demand rates we derive a closed form expression for bullwhip when demand is deterministic this is validated through a simple model of a production control system an expression for bullwhip in a pass on orders scenario with stochastic demand is also derived and validated using simulation we show the impact of changing batch size on bullwhip in a production control system our results show that a manager may achieve economies through batching while minimising the impact on bullwhip through the careful selection of the batch size

the analysis of bullwhip effect in a hmms type supply chain the aim of the paper is to investigate the well known bullwhip effect of supply chains control theoretic analysis of bullwhip effect is extensively analyzed in the literature with the laplace transform this paper tries to examine the effect for an extended holt modigliani muth simon model a two stage supply chain supplier manufacturer is studied with quadratic costs functional it is assumed that both firms minimize the relevant costs the order of the manufacturer is delayed with a known constant two cases are examined supplier and manufacturer minimize the relevant costs decentralized and a centralized decision rule the question is answered how to decrease the bullwhip effect

stock option repricing heads i win tails you lose recent scandals at enron worldcom and global crossing have put the ethical spotlight on corporate malfeasance as never before however these are the situations in which management knew that they made the wrong choice as professor joseph badaracco of harvard business school points out the real ethical dilemmas arise when people must choose between right and right where both choices can be justified yet one must be chosen over the other whether or not to reprice stock options represents one such ethical dilemma repricing can help exodus of talented employees and motivate them to improve firm performance however it alienates shareholders and other workers of the company who are left unprotected from the adverse economic consequences of a stock price decline

unions and monopoly profits using cross sectional data for u s manufacturing the author identifies a negative effect of unions on the profits of highly concentrated industries and virtually no effect on the profits of unconcentrated industries the results for concentrated industries are explained in terms of the monopoly model which predicts a negative effect of unions on profits equivalent to the change in employer s surplus the monopoly model also suggests that previous profit studies which omitted the union variable were likely to significantly underestimate the relationship between concentration and profits this prediction is also supported by empirical evidence m sany studies have demonstrated the ability of unions to raise wages above the level of nonunion workers higher union wages in turn may affect the level of prices employment capital intensity productivity and profits recent studies by clark 1982 and freeman 1983 have found significant negative effects of unions on profit rates in the united states using line of business data from 1970 to 1980 for 900 firms clark found a negative effect of unions on the rate of return to capital more specifically the union effects were found to be significantly negative when market shares were low and insignificant when market shares were high according to clark the absence of a union effect in the latter case can be explained by the ability of firms with market power to pass on higher union wages into higher prices 1982 p 47 on the other hand freeman 1983 using data from the survey of manufactures from 1958 to 1976 and the internal revenue service from 1965 to 1976 also found a negative effect of unions on profits contrary to clark s results however the union profit effect was negative only in concentrated industries the point of contention appears to be the role of concentration in determining the union profit effect rather than the overall negative impact of unions the results of clark and freeman are important because previous industrial organization research on profit rates generally ignored unions for instance of the forty six profit studies surveyed by weiss 1974 none included a union variable more recently a profit study in this review by ravenscraft 1983 using high quality line of business data from the federal trade commission also ignored unionization as will be demonstrated the omission of the union variable leads to an understatement of the effect of industrial concentration on profits this means that concentrated industries generate much greater profits than indicated by previous research in order to measure the size of the understatement a new concept employer s surplus is developed which illustrates the theoretical impact of a union wage increase on monopoly profits the empirical estimates of employer s surplus in this paper indicate how monopoly profits are divided between firms and unions most of the data used in this study were obtained from james medoff and charles brown 2 unlike the previous two studies each observation corresponds to a state by two digit sic industry for manufacturing in 1972 because of the large variations in unionization across states this data set offers a useful test of the union profit effect i employer s surplus according to accepted theory the profit maximizing monopolist will employ labor up to the point where the market wage equals the marginal revenue product mrp 3 if for simplicity we assume that all other factors are variable then the mrp curve represents the monopolist s long run demand for labor in the absence of unions employment is determined by the intersection of the mrp curve and nonunion wage wn as pictured in figure 1 if unions raise wages to wa employment will decrease from ln to l with the reducreceived for publication november 28 1983 revision accepted for publication july 6 1984 eastern washington university i am very grateful to dave bunting lisa brown bill dickens claire brown and george strauss for their valuable suggestions on this research this paper is a revised version of chapter 3 from the author s ph d thesis the union impact on profits productivity and prices university of california berkeley 1 see parseley 1980 for a recent review of this literature 2 i would like to thank brown and medoff for making these data available to me 3 marginal revenue product is equal to marginal revenue multiplied by marginal physical product see rees 1979

optimizing reorder intervals for two echelon distribution systems with stochastic demand we consider a periodic review inventory system in which n non identical retailers replenish from a warehouse which further replenishes from an outside vendor with ample supply each facility faces poisson demand and replenishes according to a base stock policy in a fixed time interval fixed costs are incurred for placing an order the warehouse fills the retailers orders in the same sequence as the occurrence of the demand at the retailers the objective is to minimize the average system cost per period this paper develops an evaluation scheme and provides a method to obtain the optimal base stock levels and reorder intervals specifically with fixed reorder intervals we show that the optimal base stock levels can be obtained by generalizing the result in the literature to find the optimal reorder intervals we first allocate the total system cost to each facility and then construct a lower bound to the allocated facility cost these lower bound functions which are separable functions of reorder i

underwater options and the dynamics of executive pay to performance sensitivities we empirically analyze the dynamics of executives pay to performance sensitivities option pay to performance sensitivities become weaker as options fall underwater often leading to pressures to reprice options or restore pay to performance sensitivity in other ways building a detailed data set on executives portfolios of stock and options we find that the responsiveness of pay to performance sensitivities created by all executive holdings of stock and options to changes in stock price is large the elasticity of pay to performance sensitivities with respect to stock price decreases is about 0 7 and is larger for high option executives and for executives with high percentages of options already underwater the dominant mechanism through which companies offset declines in option pay to performance sensitivities is larger option grants following stock price declines on average these larger grants restore approximately 40 of the stock price induced pay to performance sensitivity declines option repricings are inconsequential in this regard despite the attention they have attracted in looking at positive returns we find the reverse higher returns both directly increase pay to performance sensitivities and lead to larger option grants which raise pay to performance sensitivities further thus option grants to executives tend to be largest following large stock price increases or large stock price decreases

the stabilizing effect of inventory in supply chains this paper presents a hierarchical model framework for the analysis of the stabilizing effect of inventories in multiechelon manufacturing distribution supply chains this framework is used to compare the variance of demand to the variance of replenishment orders at different echelons of the system e g retailer wholesaler empirical data and experience with management games suggest that in most industries inventory management policies can have a destabilizing effect by increasing the volatility of demand as it passes up through the chain the bullwhip effect our model helps to explain these observations and indicates mechanisms that can promote stabilization the analysis results also define sufficient conditions for the existence of stabilization and relate these conditions to the optimality of myopic control policies

quantity discounts under demand uncertainty to motivate buyers to increase their order quantity suppliers often rely on a well established and widely used approach they offer quantity discounts this practice is in large part driven to obtain improved economies in transportation through higher truckload utilization recently transportation rates which are increasing faster than other costs have become a larger portion of total net landed cost placing the traditional quantity discount practices under scrutiny many suppliers are left perplexed as to why their approach is not effective anymore and some are even concerned that their overall profits may have actually decreased due to their discount parameters in this paper we study a multiperiod model with a buyer facing stochastic end item demand and a supplier offering an all units quantity discount to him to understand better the dynamics of such systems we provide guidelines and insights on how to set effective discount parameters and when not to expect much from them we derive the opt

paper millionaires how valuable is stock to a stockholder who is restricted from selling it abstract many firms have stockholders who face severe restrictions on their ability to sell their shares and diversify the risk of their personal wealth we study the costs of these liquidity restrictions on stockholders using a continuous time portfolio choice framework these restrictions have major effects on the optimal investment and consumption strategies because of the need to hedge the illiquid stock position and smooth consumption in anticipation of the eventual lapse of the restrictions these results provide a number of important insights about the effects of illiquidity in financial markets

revisiting the incentive effects of executive stock options abstract we develop a multiperiod framework to evaluate the incentive effects of executive stock options esos for a given increase in the grant date firm stock price and a concurrent increase in return volatility the increment of total value at the vesting date acts as a proxy for the incentive effects of esos if the option is attached to the existing contract without adjusting cash compensation we suggest that a firm should not always fix the strike price to the grant date stock price instead the strike price should vary with the length of the vesting period we also show that compared with at the money options restricted stock generates greater incentives to increase stock prices in some scenarios especially when equity based awards are vested early if the vesting period is long the firm could grant options instead of restricted stock to maximize incentives

leverage decision and manager compensation with choice of effort and volatility abstract we study the incentive effects of granting levered or unlevered stock to a risk averse manager the stock is granted by risk neutral shareholders who choose leverage and compensation level the manager applies costly effort and selects the level of volatility both of which affect expected return the results are driven by the attempt of the risk neutral shareholders to maximize the value of their claims net of the compensation package we consider a dynamic setting and find that levered stock is optimal for high type managers firms with high momentum large firms and firms for which additional volatility only implies a modest increase in expected return

a make to stock system with multiple customer classes and batch ordering this paper examines the impact of customer order sizes on a make to stock system with multiple demand classes we first characterize the manufacturer s optimal production and rationing policies when the demand is nonunitary and lost if unsatisfied we also investigate the optimal policies of a backorder system with two demand classes and fixed order sizes through a numerical study we show the effects of batch orders on the manufacturer s inventory cost as well as on the benefit of optimal stock rationing it is shown that batch ordering may reduce the manufacturer s overall cost if carefully introduced in a first come first served fcfs system with the same effective demand rates the customers order sizes also have a strong impact on the benefit of optimal stock rationing

growth and income distribution with the dynamics of power in labour and goods markets the interaction between economic growth and income distribution is examined using kaleckian post keynesian models in which there are lags in investment and in which the dynamics of income distribution between wages and profits depends on changes in power relations in both the labour market and goods market by examining these two influences on distributional dynamics simultaneously the relative strength of which can change over the growth process it is shown that the growth distributional dynamics can involve non linearities multiple equilibria and instability the implications of policy induced changes including those in macroeconomic policy and labour market and antitrust policies on aggregate demand and distribution are examined for both wage led and profit led growth regimes copyright oxford university press

the timing of option repricing we investigate whether executive stock option repricings are systematically timed to coincide with favorable movements in the company s stock price for a sample of 236 repricing events we observe sharp increases in stock price in the 20 day period following the repricing date in addition repricing dates tend to either precede the release of good news or follow the release of bad news in the quarterly earnings announcements since information about stock option repricing is not generally released to the public around the repricing date these findings suggest that ceos opportunistically manage the timing of the option repricing date

information distortion in a supply chain the bullwhip effect this article originally appeared in management science april 1997 volume 43 number 4 pp 546 558 published by the institute of management sciences consider a series of companies in a supply chain each of whom orders from its immediate upstream member in this setting inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions this paper claims that the information transferred in the form of orders tends to be distorted and can misguide upstream members in their inventory and production decisions in particular the variance of orders may be larger than that of sales and distortion tends to increase as one moves upstream a phenomenon termed bullwhip effect this paper analyzes four sources of the bullwhip effect demand signal processing rationing game order batching and price variations actions that can be taken to mitigate the detrimental impact of this distortion are also discussed

accounting for labors share class and income distribution in the printing industry this study investigates the distribution of income between capital and labor in the printing and publishing industry the authors first compare a variety of conceptualizations and operational measures of labor s share and then estimate models for the period 1946 78 that explain the movements in several share measures on the basis of variables that represent the differential power of labor and capital their findings indicate that worker power particularly the extent of unionism and sometimes strike frequency increased labor s share especially in the 1946 62 period whereas employer power asset size and capital intensity decreased it

measuring endogenous supply chain volatility beyond the bullwhip effect most recent research on supply chain volatility has focused on one particular dimension of that volatility namely the amplification of upstream order variability while not ignoring this aspect of supply chain volatility we focus on a different but equally critical aspect of volatility the cyclical oscillation of on hand and on order inventories about their target values we prove that such cyclicality does not require oscillatory or random retailer demand as a prerequisite the resulting volatility is therefore endogenous rather than simply an amplification of exogenous demand inputs we also measure the amount of amplification resulting from a step increase in demand the order amplification is the product of two factors each of which is clearly linked to either on hand or on order inventory our results attest that supply chain volatility can arise in the absence of exogenous oscillatory or random demand and suggest strategies for avoiding or minimizing such volatility

reduction of the value of information sharing as demand becomes strongly auto correlated information sharing has been identified in the academic literature as one of the most important levers to mitigate the bullwhip effect in supply chains a highly cited article on the bullwhip effect has claimed that the percentage inventory reduction resulting from information sharing in a two level supply chain when the downstream demand is autoregressive of order one is an increasing function of the autoregressive parameter of the demand in this paper we show that this is true only for a certain range of the autoregressive parameter and there is a maximum value beyond which the bullwhip ratio at the upstream stage is reduced and the percentage inventory reduction resulting from information sharing decreases towards zero we also show that this maximum value of the autoregressive parameter can be as high as 0 7 which represents a common value that may be encountered in many practical contexts this means that large benefits of information sharing cannot be assumed for those stock keeping units skus with highly positively auto correlated demand instead equally careful analysis is needed for these items as for those skus with less strongly auto correlated demand

the determination of profit margins in uk manufacturing this paper examines the determinants of profit margins in 91 u k manufacturing industries over the period 1983 86 it considers how the inclusion of labor market characteristics in empirical industrial organization specifications affects the estimated concentration margins relationship the empirical work pays detailed attention to the endogenous nature of variables derived from structural industrial organization models the authors report instrumental variables estimates of margins equations in which there emerges a significant role for labor market characteristics indeed both unionization and industrywide unemployment are found to depress profit margins the impact of concentration is seen to be biased downward when these variables are omitted

98 effective integer ratio lot sizing for one warehouse multi retailer systems a warehouse supplies n retailers constant external demand occurs at each retailer and shortages are not allowed there are linear holding costs and fixed costs for ordering at the warehouse and at each retailer the goal is to minimize the long run average cost over an infinite time horizon we define a new class of policies for this problem whose simple structure facilitates both computation and implementation the cost of a policy that is optimal within this class is shown to be within 2 of the cost of an optimal policy for the original problem in the worst case such a policy can be computed in on log n time

the optimal control of batched production and its effect on demand amplification abstract we review the control theoretic approaches made to solving aggregate production inventory problems highlighting some of their common failings one of these is the inability to realistically model batch production costs by applying a novel optimal control algorithm to a differential equation model of a production inventory system we successfully mimic these cost structures and find optimal responses to fluctuations in demand we then examine how the various penalty costs qualitatively affect the response of the system the second part of the paper deals with the supply chain phenomenon of demand amplification the tendency of small fluctuations in demand at the retailer end of the supply chain to be amplified as they are communicated down the chain by considering our production inventory system to be part of a supply chain we examine the effect of batch sizes on demand amplification under the assumption of the rational behaviour of supply chain players

incentive design under loss aversion compensation schemes often reward success b ut do not penalize failure fixed salaries with stock options or bonuses have this feature yet the standard principal agent model implies that pay is normally monotonically increasing in performance this paper shows that under loss aversion there will be intervals over which pay is insensitive to performance with the use of carrots but not sticks is frequently optimal especially when risk aversion is low and reference income is e ndogenous a further benefit of capping losses for example through options is to discourage reckless behavior by executives seeking to resurrect their fortunes jel f3 f4

work hard not smart stock options in executive compensation abstract this paper examines the optimal equity compensation for executives when executives choose a level of effort to devote to gathering information and a criterion for acting on the information gathered the optimal exercise price involves a trade off a higher exercise price moves the executive s decision criterion away from first best but provides leverage that moves the executive s effort toward first best this trade off depends on a variety of factors including the potential influence of decisions on firm value we document empirical regularities consistent with the theory such as that options are relatively less prevalent in the equity compensation of more senior executives

managers compensation and misreporting a costly state verification approach i introduction the use of stock options in compensation packages as a way of providing the firm management with the right incentives has been quite popular in the 1990s the favor encountered by options started however to decrease in the past few years the decline in the use of option grants in top executives compensation packages occurred mainly as a reaction to the recent accounting scandals which has prompted the design of alternative stock based compensation schemes e g restricted stock grants or indexed options as reported by hall and murphy 2003 the grant date value of options assigned to all employees of an average standard poor s 500 firm measured in millions of 2002 constant us increased from 22 in 1992 to 238 in 2000 and subsequently decreased to 141 in 2002 although percentages varied from year to year the ceos share of the total grant has fallen from about 7 in the mid 1990s to less than 5 in 2000 2002 1 the decline in the use of options for top management is widely confirmed according to a pearl meyer partners study for the new york times stock option grants that accounted for 52 of the pay of the average ceo of a major company in 2002 were down to an estimated 35 in 2003 a recent watson wyatt report states that the value of new stock option awards granted to ceos at large companies fell by nearly 60 between 2001 and 2003 with the average value of new stock option grants declining from us 10 2 million in 2001 to us 4 2 million in 2003 the decline in options has been softened by the sharp increase in restricted stock grants and other long term incentive award values 2 in this paper we aim to reevaluate the role of stock options as an ingredient of top management compensation packages able to align the interests of managers and shareholders avoiding misreporting of the firm value at the same time 3 in a costly state verification csv model with moral hazard we show that incentive compatible contracts inducing both incentive alignment and truthful revelation of the firm value must entail a strictly convex compensation schedule that is a fixed payment wage when the firm value is sufficiently low and a state contingent claim increasing in the firm value otherwise a simple and commonly observed way to achieve a convex compensation scheme is to design a remuneration including a fixed wage and a call option on the firm equity as we will show such remuneration allows on the one hand to preserve top management incentives providing for a compensation increasing in equity value and on the other hand to reduce the verification costs that must be incurred to avoid misreporting as verification is not needed in the region where the remuneration is fixed 4 options are by no means the only way to achieve a convex compensation however many other schemes having otherwise desirable properties over options do not have the convex shape discussed above for instance combining a fixed wage with restricted stock grants defines a compensation linearly increasing in the firm s equity value which does not allow to reduce misreporting verification costs that always have to be sustained in this case using an incentive compatible compensation scheme fixed wage plus call options we characterize the contract offered by the firm under the assumption of a deterministic and perfect audit technology showing that for any given value of the option package the manager should receive the largest possible number of options at the highest strike price allowing shareholders to reduce the expected verification cost furthermore the strike price of the option turns out to be determined by incentive compatibility i e the option value must be such that the manager is induced to exert the desired level of effort while the magnitude of the fixed wage is defined by individual rationality there are three main policy implications of our analysis

inventory performance under pack size constraints and spatially correlated demand abstract motivated by a problem facing a large retailer we consider the impact of pack size on the performance of a periodic review inventory system in the presence of spatial i e between retailers correlation of demand which we model using an equicorrelated multivariate poisson distribution employing simulation we utilise a full factorial experiment to provide support for decisions on product and supplier selection and whether or not packs should be split during distribution we consider variables such as pack size correlation and the number of branches and discuss how they and their interactions impact performance metrics such as inventory and shortage levels and the bullwhip effect

optimal exercise prices for executive stock options although exercise prices for executive stock options can be set either below or above the grant date market price in practice virtually all options are granted at the money we offer an economic rationale for this apparent puzzle by showing that pay to performance incentives for risk averse undiversified executives are typically maximized by setting exercise prices at or near the grant date market price we provide an operationally useful alternative to black scholes 1973 for the purpose of both valuing executive stock options and measuring the incentives created by options our framework has implications not only for exercise price policies but also for indexed options option repricings exchanges of cash for stock based compensation and the design of bonus plans

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

pricing executive stock options under employment shocks abstract we obtain explicit expressions for the subjective objective and market value of perpetual executive stock options esos under exogenous employment shocks driven by an independent poisson process previously we obtain the executive s optimal exercise policy from the subjective valuation that is necessary for the objective one or fair value the perpetual eso is compared with the true finite maturity eso finding that the approximation is reasonably good to illustrate the usefulness of the objective valuation for accounting purposes we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity finally the role of esos in the design of executives incentives is also discussed

stock option grants to target ceos during private merger negotiations abstract unscheduled stock options to target chief executive officers ceos are a nontrivial phenomenon during private merger negotiations in 920 acquisition bids during 1999 2007 over 13 of targets grant them these options substitute for golden parachutes and compensate target ceos for the benefits they forfeit because of the merger targets granting unscheduled options are more likely to be acquired but they earn lower premiums consequently deal value drops by 62 for every dollar target ceos receive from unscheduled options conversely acquirers of targets offering these awards experience higher returns therefore deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders

using scheduled ordering to improve the performance of distribution supply chains we study a supply chain with one supplier and many retailers that face exogenous end customer demands the supplier and the retailers all try to minimize their own inventory related costs in contrast to the retailers newsvendor type ordering behavior under which retailers may place orders freely in every period we propose two scheduled ordering policies the scheduled balanced ordering policy sbop and the scheduled synchronized ordering policy ssop under both the sbop and ssop retailers are allowed to order freely only in one period of an ordering cycle and receive fixed shipments in other periods retailers take turns to order freely under the sbop while under the ssop all retailers order freely in the same period with the average supply chain cost per period as the performance measure we identify mathematical conditions under which scheduled ordering policies outperform the newsvendor type ordering through a large scale numerical study we find that scheduled ordering policies are most effective when i the supplier s holding and expediting costs are high and the retailer s backorder cost is small ii the end customer demand variance and correlation are high and iii the supplier s capacity is high in addition we observe that the behavior of the ssop often complements that of the sbop whereas the sbop is better than ssop when the supplier s capacity is low and when the end customer demand correlation level is high the ssop is better when the opposite conditions prevail

managing supply chain demand variability with scheduled ordering policies this paper studies supply chain demand variability in a model with one supplier and n retailers that face stochastic demand retailers implement scheduled ordering policies orders occur at fixed intervals and are equal to some multiple of a fixed batch size a method is presented that exactly evaluates costs previous research demonstrates that the supplier s demand variance declines as the retailers order intervals are balanced i e the same number of retailers order each period this research shows that the supplier s demand variance will generally decline as the retailers order interval is lengthened or as their batch size is increased lower supplier demand variance can certainly lead to lower inventory at the supplier this paper finds that reducing supplier demand variance with scheduled ordering policies can also lower total supply chain costs

labour s share market structure and trade unionism abstract using british manufacturing data this paper tests kalecki s degree of monopoly theory of the determination of factor incomes the paper demonstrates how both product market structure captured by the live firm concentration ratio and trade unionism measured by collective bargaining agreements shape production worker wage share we report estimates in which it emerges that there is an important role for seller concentration in influencing wage share but the estimated trade union coverage results are less robust our tests reveal that once idiosyncratic industry effects and accounted for the union effect on wage share disappears

coordinated replenishment strategies in inventory distribution systems in this paper we study the impact of coordinated replenishment and shipment in inventory distribution systems we analyze a system with multiple retailers and one outside supplier random demand occurs at each retailer and the supplier replenishes all the retailers in traditional inventory models each retailer orders directly from the supplier whenever the need arises we present a new centralized ordering policy that orders for all retailers simultaneously the new policy is equivalent to the introduction of a warehouse with no inventory that is in charge of the ordering allocation and distribution of inventory to the retailers under such a policy orders for some retailers may be postponed or expedited so that they can be batched with other retailers orders which results in savings in ordering and shipping costs in addition to the policy we propose for supplying inventory to the retailers we also consider three other policies that are based on these well known policies in the literature a can order policy b echelon inventory policy and c fixed replenishment interval policy furthermore we create a framework for simultaneously making inventory and transportation decisions by incorporating the transportation costs or limited truck capacities we numerically compare the performance of our proposed policy with these policies to identify the settings in which each policy would perform well

one warehouse multiretailer systems with centralized stock information we consider a distribution system with a central warehouse and multiple retailers the warehouse orders from an outside supplier and replenishes the retailers which in turn satisfy customer demand the retailers are nonidentical and their demand processes are independent compound poisson there are economies of scale in inventory replenishment which is controlled by an echelon stock batch transfer policy for the special case with simple poisson demand we develop an exact method for computing the long run average holding and backorder costs of the system based on this exact method we provide approximations for compound poisson demand numerical examples are used to illustrate the accuracy of the approximations we also present a numerical comparison between the average costs of a heuristic echelon stock policy and an existing lower bound on the average costs of all feasible policies

comments on information distortion in a supply chain the bullwhip effect in this commentary we trace back how we pursued research on the bullwhip effect which resulted in the article published in management science we reflect on the evolution of this concept the impact that our work has had on industry the way our work has been used in the teaching of supply chain management and the key directions of research that have taken place since then

private information in executive stock option trades evidence of insider trading in the uk uk executives stock option exercises and associated sell decisions are motivated by private inside information executives use their inside information to lock in short term gains and to sell stock acquired prior to negative abnormal stock returns this informed trading is robust to the alternative factors that might motivate the exercise of executive stock options including option moneyness and value of exercise we suggest that the disparity in informed trading between us and uk executives option trades is related to important differences in the proportion of executive remuneration linked to options the regulation of options and the taxation of option gains

executive option repricing incentives and retention while many firms grant executive stock options that can be repriced other firms systematically restrict or prohibit repricing this article investigates the determinants of firms repricing policies and the consequences of such policies for executive turnover and retention firms that have better internal governance that use more powerful stock based incentives or that face less shareholder scrutiny are more likely to maintain repricing flexibility firms that restrict repricing are more vulnerable to voluntary executive turnover following stock price declines when share price declines are severe restricting firms appear to award unusually large numbers of new options the past several years have witnessed tremendous growth in the use of stock options to compensate corporate executives indeed virtually all of the largest publicly traded u s firms now rely on stock option plans and option grants constitute more than half of the annual pay for chief executive officers murphy 1999 a natural consequence of this growth has been an increasing awareness and sophistication among academics practitioners and the popular press about how the design and administration of option plans can help to enhance or destroy shareholder value although a number of corporate practices pertaining to executive options have elicited controversy perhaps no such practice has been more controversial than repricing which involves effectively lowering the exercise prices of previously granted options on the one hand firms often describe repricing as a useful means for restoring incentives and retaining executive talent and most stock option plans currently in existence permit repricing on the other hand shareholders and institutional investors have voiced intense opposition to the practice on the grounds that it apparently rewards managers for poor performance for instance the council of institutional investors an organization of pension funds controlling over 1 5 trillion in assets has adopted a policy statement calling on companies to restrict repricing according to ann yerger director of research at the council member funds generally detest

a multiechelon inventory model with fixed replenishment intervals this paper develops a new model for studying multiechelon inventory systems with stochastic demand for the model we assume that each site in the system orders at preset times according to an order up to policy that delivery times are deterministic and that the demand processes are stochastic with independent increments we introduce a new scheme for allocating stock in short supply which we call virtual allocation and which permits significant tractability we exercise the model on a set of test problems for two echelon systems to get insight into the structure of good policies the primary findings are that both the central warehouse upper echelon and the retail sites lower echelon should hold safety stock but that most of the safety stock should be at the retail sites consequently the central warehouse will stock out with high probability furthermore we show that the virtual allocation rule is near optimal for the set of test problems

theories of monopoly capitalism abstract this article presents a survey of theories of monopoly capitalism the defining characteristic of monopoly capitalism is that developed capitalist economies are seen as essentially dominated by firms which operate in oligopolistic industries it discusses in chronological order the contributions of hilferding lenin kalecki steindl baran and sweezy and cowling to the monopoly capitalism approach by drawing out some common features of the authors discussed we arrive at an implicit view of the nature of theories of monopoly capitalism the macroeconomic aspects of monopoly capitalism are discussed with emphasis on the implications for the level of economic activity a further section discusses the international aspects of the monopoly capital approach the final section of the paper reviews criticisms of the theories of monopoly capitalism with concentration on those advanced from a marxist perspective

industrial production volatility and the supply chain abstract the issue of production volatility is important to firms interested in managing their supply chain this paper empirically estimates the volatility of industrial production using the garch and egarch time series models three questions are addressed can volatility be predicted is the effect of unexpected changes in production on volatility asymmetric and how persistent is volatility following a production disturbance the results indicate that production volatility is time varying and can be predicted in the majority of cases examined and that overestimates of production lead to greater increases in volatility than do underestimates

are politicians really paid like bureaucrats abstract we provide the first empirical analysis of gubernatorial pay using u s data for 1950 90 we document substantial variation in the wages of politicians both across states and over time gubernatorial wages respond to changes in state income per capita and taxes we estimate that governors receive a 1 percent pay cut for each 10 percent increase in per capita tax payments and a 4 5 percent increase in pay for each 10 percent increase in income per capita in their states there is evidence that the tax elasticity reflects a form of reward for performance the evidence for the income elasticity of pay is less conclusive but is suggestive of rent extraction motives finally we find that democratic institutions play an important role in shaping pay for example voter initiatives and the presence of political opposition significantly reduce the income elasticity of pay and increase tax elasticities of pay

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

income distribution efficient bargaining and market structure we present an efficient bargaining model in which wage share is negatively associated with product market structure and varies positively with union bargaining strength the model is tested using data from a panel of u k manufacturing industries instrumental variables estimates corroborate a positive negative union bargaining strength concentration effect on labour s income share

too much of a good incentive the case of executive stock options abstract using a utility maximization framework i show that the incentive to increase stock price does not always increase as more options are granted keeping the total cost of his compensation fixed granting more options creates greater incentives to increase stock price only if option wealth does not exceed a certain fraction of total wealth beyond this critical level granting more options actually reduces incentive effects and becomes counterproductive in addition stock options also create incentive to reduce increase idiosyncratic systematic risk these incentive effects are sensitive to the choice of exercise price

optimal strike prices of stock options for effort averse executives abstract this paper evaluates the common practice of setting the strike prices of executive option plans at the money hall and murphy hall brian murphy kevin j 2000 optimal exercise prices for executive stock options american economic review 90 2 209 214 claim this practice to be optimal since it maximizes the sensitivity of compensation to firm performance however they do not incorporate effort and the possibility that managers are effort averse into their model we revisit this question while explicitly introducing these factors and allowing the reward package to include fixed wages options and stock grants we simulate the manager s effort choice and compensation as well as the value of shareholders equity under alternative compensation schemes and identify schemes that are optimal our simulations indicate that when abstracting from tax considerations it is optimal to award managers with options that will most likely be highly valuable i e substantially in the money on their expiration date prior to 2006 the tax code and financial reporting standards provided incentives to award options that are closer to the money when issued than the options that were optimal in the absence of these considerations recent tax and reporting changes voided these incentives and thus we predict that these changes will induce firms to issue options with lower strike prices than those that were issued prior to 2006

bullwhip effect measurement and its implications the bullwhip effect or demand information distortion has been a subject of both theoretical and empirical studies in the operations management literature in this paper we develop a simple set of formulas that describe the traditional bullwhip measure as a combined outcome of several important drivers such as finite capacity batch ordering and seasonality our modeling framework is descriptive in nature as it features certain plausible approximations that are commonly employed in practical inventory systems the results are nonetheless compelling and can be used to explain various conflicting observations in previous empirical studies building on the theoretical framework we discuss the managerial implications of the bullwhip measurement we show that the measurement can be completely noninformative about the underlying supply chain cost performance if it is not linked to the operational details such as decision intervals and leadtimes specifically we show that an aggregated measurement over relatively long time periods can mask the operational level bullwhip in addition we show that masking also exists under product or location aggregation in some illustrative cases

exact and approximate evaluation of batch ordering policies for two level inventory systems we consider a two level inventory system with one warehouse and n identical retailers lead times transportation times are constant and the retailers face independent poisson demand in a previous paper we derived a recursive procedure for determining the policy costs for an average item in case of one for one replenishment policies in this paper we show how these results can be used for the exact or approximate evaluation of more general policies where both the retailers and the warehouse order in batches we compare our methods to the method recently suggested by a svoronos and p zipkin

ceo incentives and firm size we develop a model that clarifies how to measure ceo incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms the crucial parameter is shown to be the elasticity of ceo productivity with respect to firm size we find that ceo marginal products rise significantly with firm size confirming rosen s conjecture that ceos of large firms have a chain letter effect on firm performance and overall ceo incentives are roughly constant or decline slightly with firm size we employ a multitask model to discuss implications for the design of control systems

trade unions and labor s share in u s manufacturing industries abstract this study assesses the impact of trade unions on labor s share of income it improves on previous tests by accounting for possible alternative explanations of an observed positive relationship between union coverage and labor s share using three digit cross sectional data on united states manufacturing industries from 1973 1975 and 1983 1985 the analysis accounts for both establishment size and worker characteristics and conducts tests across different time periods union density and establishment size are found to have a positive effect on labor s share

executive compensation a modern primer this article studies traditional and modern theories of executive compensation bringing them together under a simple unifying framework accessible to the general interest reader we analyze assignment models of the level of pay and static and dynamic moral hazard models of incentives and compare their predictions to empirical findings we make two broad points first traditional theories find it difficult to explain the data suggesting that compensation results from rent extraction by ceos however more modern shareholder value theories that arguably better capture the ceo setting do deliver predictions consistent with observed practices suggesting that these practices need not be inefficient second seemingly innocuous features of the modeling setup often made for tractability or convenience can lead to significant differences in the model s implications and conclusions on the efficiency of observed practices we close by highlighting apparent inefficiencies in executive compensation and additional directions for future research