The Choice of Operating Cash Flow in Incentive Compensation

Emeka Nwaeze
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Emeka Nwaeze: The University of Texas at San Antonio

No 8, Working Papers from College of Business, University of Texas at San Antonio

Abstract: This study examines the choice of operating cash flow (OCF) performance measure in incentive compensation contracts. The analysis is motivated in part by the recent trend in the use of OCF measure in contracts and by the paucity of empirical evidence on the reasons firms select OCF measure in contracts when the stock price and standardized earnings reports that aggregate more diverse information about firm performance are available at low cost. I find that growth firms and firms with low relative earnings quality are more likely to contract on OCF performance; financially constrained firms seem averse to contracting on OCF measure. Moreover, governance structures that impact optimal contracts positively affect the likelihood of contacting on OCF performance. Additional analysis shows that the likelihood of a particular plan-type (OCF-bonus plan versus OCF-long-term plan) is related to firms‘ business conditions.

Keywords: Incentive contracts; operating cash flow; performance measurement (search for similar items in EconPapers)
JEL-codes: J33 M41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2010-03-02
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