A study on the rationality of expensing of Taiwan employee stock bonuses

In order to follow the international trend of increasing transparency in financial statements, Taiwan began to implement regulations on expensing employee bonuses in 2008, a process that involves the use of specific dates as the basis for issuing the bonuses but which may also have the drawback of resulting in some degree of unfairness. The purpose of this paper is to study and solve the above problem.

The present study used Markov regime-switching models to obtain durations of different states, thereby obtaining average stock durations for use as the basis to calculate the number of shares to be distributed.

Empirical results show that replacing share prices on specific dates with those of average durations when issuing employee bonuses could better reflect employee-deserved real wages while keeping a company’s managers and management teams from being motivated to manage real earnings and manipulate share prices. When stock prices are higher, companies will tend to issue cash rather than stock bonuses, and vice versa when the prices are lower.

This study proposes a different point of view with regards to the basis for the allotted number of shares for employee bonuses under current laws and regulations, and suggests using the concept of average stock prices in place of the single-price concept implemented under the current system in order to avoid incentives to manipulate by people, so as to fairly express the true state of the enterprise.