Compensating for Executive Compensation: The Case for Gatekeeper Incentive Pay
Tel Aviv University - Buchmann Faculty of Law
September 4, 2008
98 California Law Review, Vol. 98, 2010
Northwestern Law & Econ Research Paper No. 08-19
A massive wave of corporate fraud at the beginning of the twenty first century exposed the failure of corporate gatekeepers. The Sarbanes-Oxley legislation accordingly targeted gatekeepers, primarily auditors, by imposing strict regulation and enhanced independence guidelines. This legislative remedy is of disputable benefit while its costs have been huge. This paper maintains that a certain type of auditor incentive compensation could work better than regulation. Under such an alternative scheme, auditors would defer a portion of the payment they receive from the client firm, which would be used to purchase shares in the client after their tenure as auditor has ended. Instead of making them simply independent, this compensation structure would cause auditors to fend against inflated share prices. This type of auditor compensation could, therefore, serve to counterbalance recent trends in executive compensation that cause managers to overstate earnings. Modern accounting standards that augment management's scope of discretion make the suggested type of auditor compensation even more beneficial. Thus, the paper advocates calls for the Securities and Exchange Commission to promulgate a safe harbor that would facilitate such compensation schemes, which current independence guidelines do not allow.
Number of Pages in PDF File: 49
Keywords: Gatekeepers, Executive Compensation, Incentive Pay
JEL Classification: K22Accepted Paper Series
Date posted: September 6, 2008 ; Last revised: August 31, 2010
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