A Significant Interrelation between Balance SheetManipulation and Stock Option Remuneration

The extent of stock option remuneration for executives has been strongly criticized due tonumerous cases of balance sheet manipulation in the USA. The (complete) incentive compatibilityof executive remuneration using stock options to the market value of the company is still a controversy.This paper contributes to the criticism with a comparison between executive remunerationin companies that have manipulated their balance sheets and a control group. As a result, CEOs ofcompanies manipulating their balance sheets in the sample received (in absolute and relativeterms) significantly more stock options than in the selected control group. When controlling forage, size, and risk as potentially confounding factors, a strong interrelation with absolute amountof stock option remuneration remains, while the interrelation to the relative amount can largely beexplained by the confounding factors. Furthermore, fixed salaries tended to be lower in manipulatingcompanies.