The Use of Non-GAAP Performance Metrics for Compensation Contracting and Financial Reporting

56 Pages Posted: 22 Oct 2013 Last revised: 12 Nov 2018

See all articles by Dirk E. Black

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Ervin L. Black

Steed School of Accounting

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Kurt H. Gee

Penn State; Financial Accounting Standards Board (FASB)

Date Written: November 10, 2018

Abstract

We explore how the use of non-GAAP performance metrics in internal compensation contracts relates to the external disclosure of non-GAAP performance measures to investors. A firm’s use of the same metric for two different objectives could reflect (a) the influence of compensation committees and managers on one another and/or (b) the relevance of similar information for compensation contracting and financial reporting. We examine the contemporaneous use of non GAAP EPS in firms’ proxy statements and annual earnings announcements using hand-collected data from firms’ SEC filings. We find that overlap in the use of non-GAAP performance metrics in both documents is primarily related to the board’s contracting decisions, which implies that the board’s use of non-GAAP EPS influences managers’ non-GAAP EPS disclosure. We also find that non-GAAP reporting quality in the earnings announcement is higher, and that investors find non GAAP earnings to be more credible when the board uses non-GAAP performance metrics internally for compensation contracting. Our results suggest that the board’s internal use of non-GAAP EPS for compensation contracting disciplines managers’ non-GAAP exclusion choices and improves the overall quality of external non-GAAP disclosure.

Keywords: Non-GAAP earnings; contracting; compensation; performance evaluation

JEL Classification: G34, M12, M41, M48, M52

Suggested Citation

Black, Dirk E. and Black, Ervin L. and Christensen, Theodore E. and Gee, Kurt H., The Use of Non-GAAP Performance Metrics for Compensation Contracting and Financial Reporting (November 10, 2018). Available at SSRN: https://ssrn.com/abstract=2343140 or http://dx.doi.org/10.2139/ssrn.2343140

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Ervin L. Black

Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-2401 (Phone)

Theodore E. Christensen (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Kurt H. Gee

Penn State ( email )

201 Old Main
University Park
State College, PA 16802
United States

Financial Accounting Standards Board (FASB) ( email )

401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
United States

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