THE EFFECT OF INCENTIVE COMPENSATION PLANS ON OPERATING PERFORMANCE AND SHAREHOLDER WEALTH: EVIDENCE FROM TAIWANESE ELECTRONIC INDUSTRY

Transcription

1 Pan-Pacific Management Review 2012, Vo1.15, No.1: THE EFFECT OF INCENTIVE COMPENSATION PLANS ON OPERATING PERFORMANCE AND SHAREHOLDER WEALTH: EVIDENCE FROM TAIWANESE ELECTRONIC INDUSTRY CHUN-HO CHEN * Department of Accounting, National Chung Hsing University CHAN-JANE LIN Department of Accounting, National Taiwan University YANN-CHING TSAI Department of Accounting, National Taiwan University ABSTRACT This paper examines the effect of incentive compensation plans of Taiwanese electronic companies on their operating performance and stock return. The results show that the employee bonus ratio measured by fair value has a positive incentive effect on subsequent operating performance before adjusting the expenses of employee bonus. But, after considering the expenses of employee bonus to adjust operating performance, the results show that greater bonus ratio do not create better subsequent adjusted operating performance. These results may be caused by excessive profit-sharing before the revising of accounting treatment for employee bonus. We also find the same results about subsequent stock return that it links the shareholder wealth. In addition, the results fail to support the hypothesis that the greater the proportion of the stock bonus the better the subsequent operating performance and stock return. Our findings We gratefully acknowledge the comments and suggestions provided by two anonymous reviewers. We also acknowledge the financial support from the National Science Council of R.O.C. * Corresponding author: Chun-Ho Chen, Department of Accounting, National Chung Hsing University, 250 Kuo Kuang Rd., Taichung 402, Taiwan, R.O.C.; Tel: #662; chhochen@nchu.edu.tw. 31

2 32 Pan-Pacific Management Review January provide some evidences to support the amendment in the accounting rules for employee bonus to reflect the compensation cost. Keywords: operating performance, stock return, incentive compensation, employee bonus, incentive effect, dilution effect (Received: June, 2011; 1 st revised: September, 2011; accepted: November, 2011) INTRODUCTION The main equity-based incentive schemes in Taiwan include employee stock bonus plan, employee stock option plan (ESOP), share repurchases transfer to employee, etc. Among them, the employee stock bonus plan is the most commonly adopted incentive scheme in Taiwan, and has become the main incentive compensation scheme of high-tech firms in recent years. The main purposes of granting huge employee bonus are to attract, motivate and retain excellent employees in order to improve firms future performance. According to Taiwanese Company Law, companies should state clearly in their respective articles the percentage of employee bonus plan, in terms of certain definition of distributable earnings. In practice, the level of the distributable earnings as employee bonus could be a fixed percentage (e.g., 5%), a certain range (e.g., 5% - 10%), or a minimum percentage (e.g., no less than 3%). 1 The employee bonus plan can be distributed either in cash or common stock. In contrast to high-tech firms, fewer companies in the traditional industry adopt the stock bonus plan. It is well recognized that the stock bonus plan in Taiwan has attracted many excellent workers to join high-tech industry in last ten years, which has helped to enhance Taiwan s competitive power of the electronic fields in the international market. 2 In July 2002, the Asian Wall Street Journal reported that foreign institutional 1 According to Article 235 of Taiwan s Company Law, firms with net earnings shall cover their prior years accumulated losses first. Then, they must appropriate 10 percent of their annual reported earnings as legal reserves before they can distribute dividends and employee bonus. The surplus of net income is called distributable net income. 2 Shih, the founder of Acer Inc., indicated that the employee bonus plan improves the development of high-tech industry in Taiwan. Taso, the former chairman of United Microelectronics Corp, expressed that the unique employee stock bonus plan in Taiwan is one of the main factors that contribute to the

3 2012 Chun-Ho Chen et al. 33 investors were seriously concerned about the accounting treatment of employee bonus by Taiwanese enterprises. Under the accounting practice of sample period in Taiwan, the employee bonus is not recognized as compensation costs in the income statement; instead, it is regarded as the distribution of earnings as shown in the statement of changes in owners equity. This treatment is not consistent with International Financial Reporting Standards (IFRS). As a result, companies issuing employee bonus tend to overstate their reported earnings, which could cause the excessive distribution of employee bonus and seriously dilute stockholders equity. Based on the prevailing accounting standards worldwide, it is no doubt that the value of the employee bonus should be booked as compensation expenses (Hsu, Chang, & Yeh, 2003). Whether the accounting for employee bonus should follow the international standards has received much debate among corporate management, regulators and academic community since then. In November 2004, to mitigate the adverse effect of the accounting treatment for employee bonus, the Securities and Futures Commission of Taiwan required that the fair value of the employee stock bonus distributed cannot exceed 50% of the net earning after tax. 3 After the dispute of accounting treatment for employee bonus, Taiwan s accounting standards setting bodies announces Accounting Standard No. 39 Accounting for Share-based payment, which requires that the fair value of employee bonus has been recognized as an expense in Income Statement since Since the studies relating to employee bonus are sparse, the main purpose of this paper is to fill this gap by investigating the association between the extent of employee bonus and subsequent operating performance and stock return. In particular, this paper examines the following issues: 1. Whether there exists an association between employee bonus and subsequent firm performance, i.e., whether firms with higher employee bonus have a long-term incentive effect and result in better future firm performance. competitive ability of the company and it could significantly improve firm s operating performance. 3 When accounting performance is used as the determinant in the compensation contract, managers have strong incentive to manipulate reported earnings (Watts & Zimmerman, 1986; Healy, 1985; Gaver, Gaver, & Austin, 1995; Holthausen, Larcker, & Sloan, 1995). Some companies in Taiwan may distribute a handsome employee bonus to substitute employee salary or cash bonus. The exclusion of compensation cost from income statement would overstate reported earnings and then help boost management compensation or help raise more capital through a higher stock price.

4 34 Pan-Pacific Management Review January 2. Whether different incentive exists with different composition of cash or stock employee bonus, i.e., whether firms with higher proportion of stock bonus have better performance in the future. The remainder of this paper is organized into six sections. Section 2 will review prior literature relating to incentive compensation and firm performance. In section 3, the hypotheses are developed, the empirical model is constructed and variables are defined. Section 4 descries the sample and present descriptive statistics. The empirical results and analyses are discussed in section 5. Finally, section 6 provides a summary and conclusion. LITERATURE REVIEW The separation of ownership and control induces agency problem between managers (agent) and shareholders (principal). The fewer shares the managers hold, the more this problem will aggravate (Jensen & Meckling, 1976). An effective incentive contract could converge the interests of managers and shareholders, and thereby mitigate the agency problem, as the incentive contract will create a positive incentive effect and improve future firm performance. Holmstorm (1979) developed the basic principal-agent model to decide the optimal incentive contract. Holmstrom and Milgrom (1991) suggested that companies should provide a higher incentive contract (e.g., higher bonus) when performance can easily be measured. Otherwise, the incentive pay should be set lower (e.g., higher base salary and lower bonus, or fixed salary). An effective incentive compensation plan motivates the employees to improve future operating performance, thus increase the stock price and enhance the wealth of shareholders. As mentioned above, the employee stock options plan has been a widespread incentive compensation scheme adopted in the U.S. In contrast, a commonly adopted incentive scheme in Taiwan is the employee bonus plan. Most prior literature on incentive compensation focuses on executive compensation and employee stock options. Among these studies, contemporaneous relationship and the impact of current compensation on subsequent firm performance have been examined. Prior studies

5 2012 Chun-Ho Chen et al. 35 generally found a positive relationship between current compensation and contemporaneous firm performance (e.g., Murphy, 1985; Lambert & Larcker, 1987; Sloan, 1993). As it is based on pay for performance, the positive relation between current compensation and contemporaneous firm performance is relatively reasonable. But prior studies have also shown inconsistencies in the relationship between current incentive compensation (such as employee stock options) and subsequent firm performance. For example, Mehran (1995) provided evidence that executive shareholding and the proportion of equity-based compensation to total executive compensation is positively related to subsequent firm performance measured by ROA and Tobin s Q. Park and Song (1995) used market value measures of performance such as Tobin s Q and Market-to-Book to examine future firm performance of employee stock ownership plans. Their results showed that the long-term performance of firms improved after adopting employee stock ownership plans. They also found that firms with an outside blockholder s monitoring could improve their future performance when adopting employee stock ownership plans. Klein (1987) indicated that implementation of employee stock ownership plan is more effective when the stock price is higher. The effective plan will increase employee commitment to the organization and decreases demission of employees. Iqbal and Hamid (2000) also concluded that a higher stock price after implementing an employee stock ownership plan would create a positive impact on productivity of employees and operating income. Bell, Landsman, Miller, and Yeh (2002) found that employee stock options are valuable intangible asset and a form of intellectual capital. In contrast, Yeo, Chen, Ho, and Lee (1999) discussed whether granting employee stock options will enhance subsequent firm performance of companies in Singapore. They found no evidence for better subsequent operating performance. Elayan, Lau, and Meyer (2001) used Tobin s Q, ROA and ROE to measure subsequent performance after adopting an incentive compensation plan. Their results also showed no better subsequent firm performance. Core, Wayne, and Kothari (1999) suggested that CEOs earn greater compensation when governance structure is less effective. In addition, their results showed that the predicted excess CEO compensation had a significant negative

6 36 Pan-Pacific Management Review January relation with subsequent firm operating performance and stock return performance. Aboody (1996) showed a negative relationship between the value of outstanding employee stock options and the stock price. Aboody reasoned that the dilution effect is greater than its incentive effect of the employee stock options. Previous studies on the employee bonus plans on equity wealth have inconsistent conclusion. Chen (2003) provided evidence that there is a positive relationship between the equity value and the employee stock bonus. He also found that the employee stock bonus provided a greater incentive effect in firms with higher investment opportunities. But Chang (1999) found that if the unexpected bonus was higher in the previous period and is still high in the current period, the cumulative abnormal stock return in the current period is lower. In addition, he showed if the employee bonus and the directors compensation which aren t recognized as compensation cost are higher, the abnormal return will be lower. Fan and Chen (2006) found that the dilution effect of employee bonus becomes stronger after public companies are required to disclose pro forma EPS, which incorporates employee bonus and directors remuneration as an expense in Besides, Leone, Wu, and Zimmerman (2006) indicated that CEO cash compensation is more sensitive to poor firm performance than to better firm performance. But Shaw and Zhang (2010) found inconsistent conclusion, their results suggest that CEO cash compensation is less sensitive to poor earnings performance than it is to better earnings performance. METHODOLOGY Research Hypotheses As mentioned earlier, an effective incentive contract could mitigate the agency problem between managers and shareholders. Prior studies in the U.S. suggested that an incentive compensation plan (mainly the employee stock option plan) can enhance employees sense of identity and create positive incentive effect on future operating performance (e.g., Long, 1978; Park & Song, 1995; Iqbal & Hamid, 2000). For the electronic firms in Taiwan, it is widely believed that the prevalence of employee bonus

7 2012 Chun-Ho Chen et al. 37 plan has contributed to the whole industry s success in recent years. We therefore conjecture that the larger the employee bonus, as measured by the employee bonus ratio (i.e., the bonus amount divided by the distributable net income), the greater the incentive to the employee and thus the better the firm performance in the future. The testing hypothesis based on the above argument is therefore stated as follows: H 1 : Ceteris paribus, firms granting higher employee bonus ratio will have better subsequent operating performance and shareholder wealth. Since employees granted stock bonus can dispose their bonus shares in the open market immediately, the total value of the bonus to employees is usually much greater than the par value (NT$10 per share). Therefore, this study attempts to use two proxies to measure the level of the employee bonus plan- the book bonus ratio (i.e., the book value of employee bonus divided by distributable net income) and the market bonus ratio (i.e. the fair value of employee bonus divided by distributable net income). As to the measurement of firm performance, this study employed both accounting and market performance measures, including ROA and stock return. In contrast to cash compensation (e.g., base salary, cash bonus etc.), Mehran (1995) indicated that the ratio of equity-based compensation to total compensation of top executives is positively related to future firm performance. According to Taiwan s Company Law, the employee bonus can be paid either in cash or in common stock. Since the average stock price per share was much higher than the par of NT$ 10 during the sampling period, we predict that employees would prefer stock to cash bonus. Therefore, the higher the proportion of the stock bonus granted, the better the subsequent firm performance. Based on the above arguments, the second testing hypothesis is described as follows: H 2 : Ceteris paribus, firms granting the higher proportion of stock bonus will have better subsequent operating performance and shareholder wealth.

8 38 Pan-Pacific Management Review January Empirical Model and Variables In this study, ROA, adjusted-roa, and buy and hold stock return are employed as proxies for firm performance. 4 Adjusted-ROA is computed after recognizing the fair value of employee bonus as compensation expenses to reflect actual operating performance. Because the employee bonus of each company may fluctuate in different years, this study uses the average bonus ratio over the three-year period prior to the base year. 5 The empirical models of this paper are as follows: ROA i t+k = β 0 + β 1 EBR i t-2,t + β 2 ESB i t-2,t + β 3 SALARY it + β 4 RD it + β 5 ln(asset it ) + β 6 CEO it + β 7 DIR it + β 8 DIRCH it + β 9 STDROA it +β 10 YEAR it + ε i t+k...(1) BHR i t+k = β 0 + β 1 EBR i t-2,t + β 2 ESB i t-2,t + β 3 SALARY it + β 4 RD it + β 5 ln MVE it + β 6 CEO it + β 7 DIR it + β 8 DIRCH it + β 9 STDRET it + β 10 MTB it + β 11 YEAR it + ε i t+k.....(2) The dependent variables (subsequent performance indicators) are defined as follows: ROA i,t+k = the average return on assets from year t+1 to t+k for firm i, where return on assets is defined as earnings before interests and taxes divided by total asset. BHR i,t+k = the buy and hold stock return from year t+1 to t+k for firm i, where R t+k is the annual stock return at the year t+k. The independent variables are defined as follows: EBR it-2, t = the average bonus ratio from year t-2 to year t for firm i. The ratio of the book value of the employee bonus to the distributable net income is called the book bonus ratio (EBR_BV). In addition, the ratio of the fair value of the employee bonus on ex-dividend day to the distributable net income is called the market bonus ratio (EBR_MV). 4 Due to lack of data of non-financial performance indicators, this study doesn t employ any non-financial performance indicators to measure subsequent firm performance. 5 In this study, year 1999 is defined as the base year to investigate the association between employee bonus and subsequent firm performance. In sensitivity analysis, year 1997 was used as an alternative for base year.

9 2012 Chun-Ho Chen et al. 39 ESB it-2, t = the average proportion of stock bonus to total bonus measured in book value from year t-2 to year t for firm i. SALARY it = the reported salary expense per employee at year t for firm i to control for the possible impact on subsequent firm performance. RD it = the R&D intensity at year t for firm i, which is defined as R&D expenditures divided by net sales. Prior studies employed R&D investment as the proxy for growth opportunity (Smith & Watts, 1992; Mehran, 1995). In addition, prior studies found that there is a positive relationship between R&D expenditure and future firm performance (Sougiannis, 1994; Lev & Sougiannis, 1996; Deng, Lev, & Narin, 1999). ASSET it = total assets at the end of year t for firm i to control for size effect on firm performance. MVE it = the market value of shareholder equity at the end of year t for firm i to control for size effect on stock return (Banz, 1981). CEO it = the shareholding of CEO at the end of year t for firm i. Corporate governance literature indicated that higher CEO ownership would mitigate the agency problem between shareholders and managers and therefore result in better firm performance. DIR it = the directors and supervisors shareholding at the end of year t for firm i. Core et al. (1999) found that subsequent firm performance is affected by ownership and board composition. It is predicted that directors with higher ownership will have higher motivation to monitor firm performance. DIRCH it = the change in directors and supervisors shareholding over year t for firm i. DIRCH it represents directors expectation about firm future performance under information asymmetry. A positive relationship between the change of the directors shareholding and subsequent firm performance is expected. STDROA it = the standard deviation of return on assets over the past five years (from year t-4 to year t) for firm i to control for earnings variability or business risk (Mehran, 1995 ; Core et al., 1999).

10 40 Pan-Pacific Management Review January STDRET it = the standard deviation of the 52 weekly stock returns at year t for firm i to control for variation of stock return (Core et al., 1999). MTB it = the market-to-book ratio of equity at the end of year t for firm i to control for Market-to-Book effect (Fama & French, 1992). A negative association is expected. YEAR it = a dummy variable, which is equal to one if the base year of observations is year 2001, and zero if the base year of observations is year 1999 to control for the effect of business cycle. SAMPLE AND DESCRIPTIVE STATISTICS Data and Sample This study tries to explain the association between employee bonus and subsequent firm performance of electronic companies listed in Taiwan Stock Exchange (TSE) from 1997 to The data needed for this research were mainly collected from Taiwan Economic Journal (TEJ) database. The sample firms included in this study must meet the requirement of complete data of employee bonus and subsequent firm performance. The sample contains electronic companies listed in the TSE during Firms having a loss in the base year were excluded, because they were unable to distribute employee bonus to their employees according to the Taiwanese Company Law. Firms that went private were also excluded from the final sample. Both 1999 and 2001 are considered as the base year to evaluate subsequent firm performance. 7 The employee bonus for and was used to calculate the average bonus ratio in order to measure the level of bonus ratio smoothly. In order to compute STDROA t, ROA data over the last five years prior to the base year 6 Because the accounting rules of employee bonuses have been changed since 2008, it will change substantially about employee bonuses plan. Hence, we test this relationship before expensing employee bonus for avoiding this influence. 7 The number of valid observations would have decreased sharply especially in listed electronic companies if an earlier year were selected as the base year. For example, when 1995 was defined as the base year, which would allow a longer window to test subsequent firm performance; but the number of valid observations was less than thirty. In contrast, using a later year as the base year will lead to shorter window to test subsequent firm performance.

11 2012 Chun-Ho Chen et al. 41 are needed. After deleting companies with incomplete data, the final sample contains 164 electronic firms for testing the association between employee bonus and subsequent accounting performance. Whereas, the final sample consists 160 electronic firms for testing the relationship between employee bonus and subsequent stock return. Descriptive Statistics The descriptive statistics for the employee bonus variables, subsequent firm performance measures and control variables of the sample firms are reported in Table 1. The mean (median) of the average book bonus ratio (EBR_BV t-2, t ) is 7.32% (7.12%), with maximum of 18.63%. The mean (median) of the average market bonus ratio (EBR_MV t-2, t ) over the sample period is 39.60% (32.27%), with maximum of %. The mean (median) of the average proportion of the stock bonus to total employee bonus (ESB t-2, t ) was 85.59% (100%). In other words, more than half of the sample firms granted only stock bonus to employees. With respect to subsequent firm performance, Table 1 shows that, after expensing employee bonus, the mean adjusted ROA between t+1 and t+3 (A_ROA t+3 ) is 5.37%, which is 1.80% lower than mean unadjusted ROA over the same period (ROA t+3 ). During our sample period, the mean of buy and hold stock return performed poorly, with BHR t+3 equal to %. All the pearson correlation coefficient of independent variables are less than 0.6 in the equation 1-3, respectively and the variance inflation factors (VIF) of all independent variables are less than 10. These results indicate that there is no serious collinearity problem in our sample.

12 42 Pan-Pacific Management Review January TABLE 1 Descriptive statistics Mean Median Max Min SD Subsequent firm performance: ROA t+1 (%) ROA t+3 (%) A_ROA t+1 (%) A_ROA t+3 (%) BHR t+1 (%) BHR t+3 (%) Bonus variables: EBR_BV t-2, t (%) EBR_MV t-2, t (%) ESB t-2, t (%) Control variables: SALARY t (in thousands) , RD t (%) CEO t (%) DIR t (%) DIRCH t (%) ASSET t (in millions) 12,834 2, ,742 1,673 46,484 MVE t (in millions) 27,940 2,513 1,471,879 2, ,991 STDROA t (%) STDRET t (%) MTB t Notes: ROA t+1 = the earnings before interest and tax divided by total assets at year t+1. ROA t+3 = the average ROA during year t+1 and year t+3. A_ROA t+1 = the adjusted-roa at year t+1,after deducting fair value of employee bonus from earnings. A_ROA t+3 = the average adjusted-roa during year t+1 to year t+3, after deducting fair value of employee bonus from earnings. BHR t+1 = the annual stock return at year t+1. BHR t+3 = the buy and hold stock return during year t+1 to t+3. EBR_BV t-2, t = the average book bonus ratio from year t-2 to year t. The book bonus ratio is defined as the book value of employee bonus divided by distributable net income.

13 2012 Chun-Ho Chen et al. 43 EBR_MV t-2, t = the average market bonus ratio from year t-2 to year t. The market bonus ratio is defined as the fair value on ex-dividend date of employee bonus divided by distributable net income. ESB t-2, t = the average proportion of stock bonus to total bonus during year t-2 to year t. SALARY t = the reported salary expense per employee at year t. RD t = the R&D intensity at year t, defined as R&D expenditures divided by net sales. CEO t = the shareholding of CEO at the end of year t. DIR t = the directors shareholding at the end of year t. DIRCH t = the change of directors shareholding over year t. ASSET t = the total assets at the end of year t. MVE t = the market value of shareholder equity at the end of year t. STDROA t = the standard deviation of return on assets over the past five years (from year t-4 to year t). STDRET t= the standard deviation of 52 weekly stock returns at year t. MTB t = the market-to-book ratio of equity at the end of year t. EMPIRICAL RESULTS This paper examines the relationship between employee bonus of Taiwanese electronic companies and their subsequent operating performance and stock return. Since problems of heteroskedasticity generally occur in regression analyses, we use the White adjusted t-statistic (White, 1980). Employee Bonus and Subsequent ROA Table 2 and Table 3 present the regression results of subsequent ROA and adjusted ROA on employee bonus respectively. The first two columns of Table 2 report the impact of book bonus ratio (EBR_BV) and average proportion of stock bonus (ESB t-2, t ) on ROA at t+1 and average ROA from t+1 to t+3. It is found that there exists a positive association with the book bonus ratio but not attain at 10% significant level. However, we find a negative effect of ESB on subsequent ROA performance. As to the impact of market bonus ratio (EBR_MV), the results from the third and fourth columns of Table 2 strongly support the hypothesis that higher bonus ratio will result in better subsequent firm performance. But, we find a significantly negative effect of ESB on subsequent ROA performance and the second hypothesis relating to the impact of ESB was not supported either in these two equations. With respect to control variables, the results

14 44 Pan-Pacific Management Review January indicate that reported salary expense per employee (SALARY), R&D intensity (RD), directors shareholding (DIR) and the standard deviation of ROA (STDROA) has significant influence on the subsequent ROA performance. TABLE 2 Regressions of subsequent ROA on employee bonus Predicted Sign ROA t+1 ROA t+3 ROA t+1 ROA t+3 EBR_BV (0.17) (0.31) EBR_MV (3.22)*** (1.79)** ESB (-0.79) (-1.24) (-1.70)** (-1.78)** SALARY (1.66)** (1.86)** (1.54)* (1.79)** RD (2.73)*** (3.65)*** (1.46)* (2.74)*** ln ASSET? (1.58) (0.37) (0.80) (-0.01) CEO (0.42) (0.19) (0.03) (0.01) DIR (1.91)** (2.31)** (2.00)** (2.44)*** DIRCH (-0.40) (0.69) (-0.34) (0.72) STDROA? (3.55)*** (2.11)** (3.45)*** (2.04)** Adj-R 2 (%) F statistics Notes: 1. The variables are as defined in Table The coefficient significance statistics produced by regression are modified based on White heteroskedasticity-corrected standard deviation. 3. t statistics are presented in parentheses. ***, ** and * denote significance at 1%, 5%, and 10%, respectively.

15 2012 Chun-Ho Chen et al. 45 In Table 3, we noticed that after considering the fair value of the employee bonus as an expenses, neither book nor market bonus ratio was found to have positive significantly impact on the adjusted-roa at t+1 or average adjusted-roa from t+1 to t+3. These results are inconsistent with the expectation of this paper and do not support the first hypothesis H 1. Interestingly, all the signs of the coefficients change and become negative. These results are inconsistent with the conclusion from Table 2, where unadjusted ROA is a proxy for subsequent firm performance. An explanation for these differences may be that although the employee bonus has a gross incentive effect, the granting of excessive distribution of employee bonus (or excessive profit-sharing) leads to inconsistent results. With respect to the composition of the employee bonus, all the coefficients of the proportion of stock bonus are negative significantly at 5% or 10% level. The results show that the proportion of stock bonus has a significantly negative relation with subsequent one-year adjusted-roa and three-year adjusted-roa. In short, these results fail to support the second hypothesis H 2.

16 46 Pan-Pacific Management Review January TABLE 3 Regressions of subsequent adjusted-roa on employee bonus Predicted Sign A_ROA t+1 A_ROA t+3 A_ROA t+1 A_ROA t+3 EBR_BV (-1.41)* (-1.45)* EBR_MV (-0.14) (-0.43) ESB (-1.53)* (-1.65)** (-1.70)** (-1.68)** SALARY (1.85)** (2.08)** (1.88)** (2.13)** RD (1.57)* (2.92)*** (1.29)* (2.68)*** ln ASSET? (0.65) (-0.42) (0.87) (-0.09) CEO (0.03) (-0.28) (0.15) (-0.11) DIR (1.68)** (2.29)** (1.94)** (2.56)*** DIRCH (-0.16) (0.81) (-0.22) (0.74) STDROA? (2.48)** (1.52) (2.58)** (1.65) Adj-R 2 (%) F statistics Notes: 1. The variables are as defined in Table The coefficient significance statistics produced by regression are modified based on White heteroskedasticity-corrected standard deviation. 3. t statistics are presented in parentheses. ***, ** and * denote significance at 1%, 5%, and 10%, respectively. Employee Bonus and Subsequent Stock Return Table 4 presents the regression results of the subsequent buy and hold stock return, i.e., the measure of firm s market performance, on employee bonus variables and other control variables. Table 4 shows that both book bonus ratio and market bonus ratio has negative effect on subsequent market performance. Furthermore, these results indicate that book bonus ratio has a statistically significant negative relation with subsequent

17 2012 Chun-Ho Chen et al. 47 one-year stock return at 10% level. With respect to the composition of the employee bonus, the coefficients of the proportion of stock bonus are all negative but not significant. These empirical results do not support the second hypothesis H 2. One possible explanation of these results is that due to no lock-up period for the employee stock bonus, the employees could sell their shares immediately after receiving the stock bonus. With respect to the control variables, the coefficients of the R&D intensity are significantly positive on subsequent 3-year stock return are presented in Table 4. The results show that the higher the R&D intensity of electronics companies, the higher the subsequent stock return. In addition, all the coefficients of the change of directors shareholding (DIRCH) are positive and significantly positive impact on subsequent 3-year stock return. This means when the directors sell their own shares and reduce the percentage of shareholding, the subsequent stock return is lower, which is consistent with the expectations of this paper. Besides, we also find that salary expense per employee and the shareholding of CEO have significantly positive association with subsequent one-year and three-year stock return, respectively.

18 48 Pan-Pacific Management Review January TABLE 4 Regressions of subsequent stock return on employee bonus Predicted Sign BHR t+1 BHR t+3 BHR t+1 BHR t+3 EBR_BV (-1.84)** (-0.82) EBR_MV (-1.05) (-0.31) ESB (-0.60) (-0.52) (-0.51) (-0.53) SALARY (2.09)** (1.10) (2.12)** (1.12) RD (1.57)* (2.24)** (1.56)* (2.13)** ln MVE (-1.20) (-0.14) (-0.73) (0.04) CEO (0.57) (1.93)** (0.82) (2.00)** DIR (1.05) (0.90) (1.32)* (1.04) DIRCH (1.46)* (2.31)** (1.37)* (2.26)** STDRET? (0.37) (-0.54) (0.27) (-0.57) MTB (0.01) (-0.71) (-0.12) (-0.68) Adj-R 2 (%) F statistics Notes: 1. The variables are as defined in Table The coefficient significance statistics produced by regression are modified based on White heteroskedasticity-corrected standard deviation. 3. t statistics are presented in parentheses. ** and * denote significance at 5%, and 10%, respectively. Robustness Tests The sensitive analyses in this study include (1) change of the base year (2) alternative measure of subsequent stock return and (3) alternative measure of fair value of stock bonus. The results are stated below.

19 2012 Chun-Ho Chen et al. 49 Change of the Base Year The first robustness test, we try to change the base year from 1999 and 2001 to 2002 and The regression results of subsequent firm performance on employee bonus variables and other control variables are presented at Table 5. Panel A and B of Table 5 present the regression results of subsequent adjusted ROA and subsequent stock return, respectively. TABLE 5 Robustness test: change of the base year Panel A: Regressions of subsequent adjusted-roa on employee bonus Predicted Sign One-year Three-year One-year Three-year EBR_BV (-0.63) (-0.78) EBR_MV (-0.15) (0.78) ESB (-2.06)** (-2.37)*** (-1.78)** (-2.64)*** Panel B: Regressions of subsequent stock return on employee bonus Predicted Sign One-year Three-year One-year Three-year EBR_BV (-0.89) (-2.19)** EBR_MV (-1.03) (-1.37)* ESB (0.02) (0.19) (0.49) (0.55) Notes: 1. The variables are as defined in Table The coefficient significance statistics produced by regression are modified based on White heteroskedasticity-corrected standard deviation. 3. t statistics are presented in parentheses. ***, **, and * denote significance at 1%, 5%, and 10%, respectively. Panel A of Table 5 shows that the change of base year does not affect the findings related EBR_BV and EBR_MV in Table 3, where the base year is 1999 and With respect to the composition of the employee bonus, all the coefficients of the proportion

20 50 Pan-Pacific Management Review January of stock bonus are significantly negative related to the subsequent one-year and three-year adjusted-roa. These results, similar to that in Table 3, fail to support the second hypothesis H 2. Panel B of Table 5 shows that the coefficients of the bonus ratio are all negatively related to the subsequent stock return and coefficients of the proportion of the stock bonus are mostly positive but insignificant. These results still do not support the hypotheses H 1 and H 2, which is consistent with that found in Table 4. Alternative Measure of Subsequent Stock Return With respect to the different measurement of subsequent stock return, this paper uses abnormal stock return as an alternative measurement. The abnormal buy and hold return (BHAR) is defined as follows: BHAR i, t+k = BHR i, t+k - ˆ ˆ * R, i i m t k Where BHR t+k is buy and hold stock return during year t+1 to t+k; ˆ ˆ * R, i i m t k is the required rate of return by using the market model during year t+1 to t+k. 8 The untabulated results are similar to that in Table 4 and still do not support the two testing hypotheses. Alternative Measure of Fair Value of Stock Bonus The third robustness test is related to the fair value of employee bonus. In stead of using ex-dividend price, market bonus ratio was recalculated based on the average stock price of the last month of the year. The untabulated results remain unchanged. In other words, our empirical findings are quite robust and are not sensitive to the measure of fair value adopted. 8 First, we estimate the beta coefficient using 120 daily return observations. Then, we calculate average β coefficient during year t+1 to t+k to estimate β i,t+k. The return of Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) during year t+1 to t+k is used as a proxy of market return R m, t+k., and one-year rate of Treasury Bill as a proxy of risk-free rate R f, t+k.

21 2012 Chun-Ho Chen et al. 51 CONCLUSIONS The employee stock bonus plan is a commonly adopted incentive compensation scheme in Taiwan, especially in high-tech industry. Under the accounting practice of sample period in Taiwan, the employee bonus are not recognized as compensation cost, which results in an overstatement of the reported earnings and induces excessive distribution of employee bonus. The main purpose of this paper is to investigate the relationship between employee bonus and subsequent firm performance, in other words, whether granting higher employee bonus is associated with better subsequent firm performance. The second purpose of this paper is to examine whether higher proportion of stock bonus will help enhance better subsequent firm performance. Using electronic industry as a sample, our empirical results find a significantly positive relationship between the market bonus ratios of Taiwanese electronic companies with their subsequent accounting performance measured by ROA. However, when the fair value of employee stock bonus is considered as an expense according IFRS, the positive effect disappears. That is, the first hypothesis is no longer supported. We conjectured that it may be caused by the excessive profit-sharing of employee bonus. With respect to the composition of the employee bonus, the empirical results show that there is no positive relationship between the proportion of stock bonus and subsequent firm performance (both accounting and market performance). The above results seem to indicate that electronic companies with higher proportion of stock bonus did not perform better in subsequent period relative to companies with lower proportion of stock bonus. In contrast to prior studies, this paper has two main contributions. First, prior studies examine the relationship between employee bonus and contemporaneous firm performance (e.g., Murphy, 1985; Lambert & Larcker, 1987; Sloan, 1993). This paper tries to examine employee bonus plan and subsequent firm performance and the results show excess profit-sharing when employee bonuses are not expensing. Second, this paper tries to adjust firm performance by expensing employee bonuses according to

22 52 Pan-Pacific Management Review January IFRS. Our findings indicate the dilution effect exceed incentive effect of employee bonus plan after expensing employee bonuses. The results from this paper seem to suggest that companies should be very careful when making employee bonus decisions to avoid the adverse impact of excessive dilution effect. The results provide the policy implication for the competent authority. Our finding indeed is consistent with the notion of the amendment in the accounting rules for employee bonus to reflect the compensation cost according IFRS. Besides, the competent authority may pay attention to whether firms grant excessive compensation to top executives. By doing so, it not only help improve the reliability and transparency of financial reporting, but also help set a reasonable compensation plan. The future research may try to explain how investors respond to the employee bonus information by using a rational expectations model during different period.

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26 56 Pan-Pacific Management Review January Biographical Sketch Chun-Ho Chen is an assistant professor of the Department of Accounting at National Chung Hsing University. He received his Ph. D. in accounting at National Taiwan University. His primary research focuses on compensation plan, corporate governance, and earnings management. Chan-Jane Lin is a full professor of the Department of Accounting at National Taiwan University. She received his Ph. D. in accounting at University of Maryland, USA. Her primary research focuses on auditing, earnings management, and corporate governance. Yann-Ching Tsai is a full professor of the Department of Accounting at National Taiwan University. He received his Ph. D. in accounting at University of California, Los Angeles, USA. His primary research focuses on financial reporting, financial accounting, and corporate governance.

27 2012 Chun-Ho Chen et al. 57 激勵薪酬對營運績效與股東財富之影響 : 台灣資訊電子業之實證 陳俊合 * 國立中興大學會計系助理教授林嬋娟國立台灣大學會計系教授蔡彥卿國立台灣大學會計系教授 中文摘要 本文特別針對台灣資訊電子業為研究樣本, 探討員工紅利對營運績效與股票報酬之影響 本研究發現市值衡量員工紅利比率與未調整後續營運績效具有正向關聯, 但調整員工紅利費用化後的後續營運績效, 則不再支持員工紅利比率愈高其後續績效愈佳之研究假說, 此可能肇因於過度發放員工紅利所致, 此意謂著企業應以最適員工紅利來激勵員工, 才能在股東與員工之間取得平衡, 達到雙贏目標 此外, 本研究發現, 當股票紅利比例愈高, 其後續營運績效與股票報酬並未顯著愈佳 主管機關已修改員工紅利會計處理,2008 年起將員工紅利依公允價值認列酬勞成本, 除使財務報表更加允當表達, 並有助於企業訂定合理的獎酬制度, 以有效提昇公司價值 而本研究之發現, 亦為員工紅利會計處理修正提供有利之實證依據 關鍵詞 : 營運績效 股票報酬 激勵薪酬 員工紅利 激勵效果 稀釋效果 * 通訊地址 : 陳俊合, 國立中興大學會計系,402 台中市南區國光路 250 號 chhochen@nchu.edu.tw