Earnings-based compensation schemes and discretionary accrual and expenditure decisions over CEO tenure

Article Abstract:

Keywords: Accounting research, Performance-related pay, Chief executives, Creative accounting, Performance measurement USA This paper examines the link between the sensitivity of compensation to accounting earnings over CEO tenure and the discretionary accrual and expenditure decisions made by CEOs during their career. It finds that the sensitivity of compensation to earnings during the first-half of the CEO's tenure is significantly greater than during the second-half. The opposite is the case for the association of compensation with stock returns. However, not all managers make income-increasing earnings management decisions during the initial stages of their tenure to exploit the higher weight on first period earnings. Instead, it is observed that for a given amount of earnings growth, those CEOs who make income-increasing decisions during the first-half of their tenure, on average, get a significantly lower increase in cash compensation than those who make income-decreasing or no discretionary accrual decisions. The evidence is supportive of an efficient contracting environment where shareholders use early career earnings management decisions of CEOs as screening devices.

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Selecting optimal executive compensation scheme under uncertainty and the role of the covariance factors

Article Abstract:

Keywords: Accounting research, Pay structures, Senior management Goal congruence, Uncertainty Assuming optimization of manager's expected utility of end-of-period wealth, this paper examines the firm's output decision under the following incentive compensation schemes: 1. Profit sharing (fixed salary plus a fixed percentage of profit), 2. Holding a fixed portion of a company's stocks, 3. Profit sharing plus stock option. It shows that under uncertainty, the compensation scheme that leads to greater output level congruity for both managers and owners wealth maximization depends on the sign of the covariance between the price of the firm's product and the firm's stock value. The basic profit sharing scheme for managers is more consistent with stockholders wealth maximization when the covariance factor is negative (firm is price taker). Stock option with profit sharing leads to greater goal congruity when the covariance factor is positive (firm is price maker).

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The relationship between pay-for-performance contracting and external monitoring

Article Abstract:

Keywords: Accounting research, Performance-related pay, Chief executives, Company performance, USA CEO compensation practice sheds light on agency costs in the form of contracting and incentive alignment. In the framework of minimizing total contracting costs, monitoring costs and bonding costs substitute at the margin. Compensation sensitivity to firm performance is a bonding cost that suggests that compensation sensitivity to performance should decline as monitoring increases. Empirical results presented here indicate that external monitors decrease the use of pay-for-performance contracting, consistent with agency cost-based contracting. These results suggest that CEO compensation contracts are part of a package of behavior controls and are, on average, responsive to firm performance.

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