Cost shielding in executive bonus plans

Matthew Bloomfield, Brandon Gipper, John D. Kepler and David Tsui

Journal of Accounting and Economics, 2021, vol. 72, issue 2

Abstract: Executive bonus plans often incorporate performance measures that exclude particular costs—a practice we refer to as “cost shielding.” We predict that boards use cost shielding to mitigate underinvestment and insulate new managers from the costs of prior executives’ decisions. We find evidence that boards use cost shielding to deter underinvestment in intangibles and encourage managers to take advantage of growth opportunities. We also find that cost shielding tends to be elevated for newly-hired executives, and decreases over tenure. Collectively, our results suggest that boards deliberately choose performance metrics that alleviate agency conflicts.

Keywords: Executive compensation; Cost shielding; Managerial incentives; Performance measurement; Bonus contracts; Agency theory (search for similar items in EconPapers)
JEL-codes: G34 J3 M12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:72:y:2021:i:2:s0165410121000434

DOI: 10.1016/j.jacceco.2021.101428

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