ABSTRACT
In this chapter, we discuss the relation between fair value measures reported in the financial statements and executive compensation. We start with a brief discussion of the broader issue of the compensation relevance of accounting numbers, and other non-accounting measures. Here we present the desired properties of a measure that make it compensation relevant. We next review the literature and the evidence on whether fair value measures are associated with executive compensation. We then go on to discuss how compensation expense itself may be fair valued. This is the case when employees, top executives in particular, are paid with options and restricted stocks (RS).
