Getting compensation right - The choice of performance measures in CEO bonus contracts and earnings management

Muhammad Tahir, Salma Ibrahim and Mohamed Nurullah

The British Accounting Review, 2019, vol. 51, issue 2, 148-169

Abstract: This paper examines whether the choice of performance measures in CEO bonus compensation contracts is associated with earnings management. From a sample of FTSE350 Index firms over the period of 2005–2014, we investigate the relationship between earnings management, through discretionary accruals and real activities management, and (1) the use of and extent of reliance on financial and non-financial performance measures in CEO bonus contracts; and (2) the use of long-term and short-term measures in CEO bonus contracts. We find less income-increasing manipulation through discretionary accruals and expenses when non-financial performance measures (NFPMs) are used alongside financial performance measures (FPMs) and when the NFPMs are used to a larger extent than FPMs. Furthermore, we find less discretionary accruals when long-term performance measures are used. This implies that non-financial and long-term measures encourage executives to work towards the long-term success of the company rather than their own short-term reward.

Keywords: Earnings management; Executive compensation; Financial and non-financial performance measures; Discretionary accruals; Real activities management (search for similar items in EconPapers)
JEL-codes: M12 M41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:51:y:2019:i:2:p:148-169

DOI: 10.1016/j.bar.2018.09.004

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