Earnings per share targets and CEO incentives

Christopher Armstrong (), Jacky Chau (), Christopher D. Ittner () and Jason J. Xiao ()
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Christopher Armstrong: Stanford University
Jacky Chau: Chinese University of Hong Kong
Christopher D. Ittner: University of Pennsylvania
Jason J. Xiao: Binghamton University, SUNY

Review of Accounting Studies, 2025, vol. 30, issue 1, No 5, 156-201

Abstract: Abstract We examine differences in CEOs’ achievement of earnings per share (EPS) targets related to (1) analysts’ forecasts and (2) internal cash bonus payouts. Our focus on firms with different benchmarks for the same performance metric enables us to assess the relative importance of the incentives that each EPS target provides based on its revealed achievement. Most CEOs meet analysts’ final consensus EPS forecasts but are unlikely to meet bonus EPS targets that exceed forecasted EPS. Nearly all CEOs receive some EPS-based cash bonus, even when missing the forecast. Moreover, CEOs with bonus targets that are easier to achieve than the consensus forecast tend to receive more annual pay, suggesting that boards often set more achievable EPS targets to provide extra compensation to CEOs while maintaining the appearance of pay-for-performance. Our results highlight the importance of considering both types of EPS targets simultaneously when assessing their respective incentive properties.

Keywords: Earnings per share (EPS); Earnings targets; CEO incentives; Bonus contracts; Analysts’ forecasts; Meet or beat; M12; M40; M41; J33 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-023-09815-3

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