IFRS and the Use of Accounting-Based Performance Measures in Executive Pay

75 Pages Posted: 11 Jul 2011 Last revised: 4 Aug 2012

See all articles by Georgios Voulgaris

Georgios Voulgaris

University of Manchester - Alliance Manchester Business School; Alliance Manchester Business School

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: August 3, 2012

Abstract

We examine the effect of IFRS on the use of accounting-based performance measures for evaluating and rewarding managers. We show that post-IFRS firms decrease the weight of Earnings-per-Share (EPS) based performance measures in CEO pay contracts. We provide indications that IFRS add “noise” to accounting numbers which, based on optimal contracting theory, makes reported earnings less useful for evaluating managerial performance. We argue that this is mainly due to the adoption of “fair value” accounting (FVA), which potentially makes accounting numbers more value-relevant, but also more volatile and sensitive to market movements. This study suggests that, whilst under IFRS accounting earnings could be more useful for stock market valuation purposes, this is achieved at the expense of other purposes that accounting serves, i.e., stewardship/performance contracting. Our findings suggest that when accounting numbers are designed to conform more closely to market values, they become less able to provide information over what is complementary to market values for evaluating managerial performance.

Keywords: Optimal Contracting, IFRS, Performance Measures, Executive Pay, Fair Value Accounting

JEL Classification: M41, G34, M21

Suggested Citation

Voulgaris, Georgios and Stathopoulos, Konstantinos and Walker, Martin, IFRS and the Use of Accounting-Based Performance Measures in Executive Pay (August 3, 2012). Available at SSRN: https://ssrn.com/abstract=1883249 or http://dx.doi.org/10.2139/ssrn.1883249

Georgios Voulgaris (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Alliance Manchester Business School ( email )

Booth street west
Manchester, Greater manchester M15 6PB
United Kingdom

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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