The Use of Non-GAAP Performance Metrics for Compensation Contracting and Financial Reporting
56 Pages Posted: 22 Oct 2013 Last revised: 12 Nov 2018
Date Written: November 10, 2018
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: Suggested Citation