Beating the Target: Performance Management Around the Annual Incentive Target

43 Pages Posted: 4 Feb 2014 Last revised: 26 Aug 2014

See all articles by Daniel Sungyeon Kim

Daniel Sungyeon Kim

Peking University HSBC Business School

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 1, 2014

Abstract

We document the propensity of Standard & Poor’s 500 index companies to just meet, rather than overshoot or just miss, performance targets in CEOs’ annual incentive plans to boost cash bonuses. The statistical anomaly occurs only in the 4th quarter and is robust to alternative assumptions of performance distribution, but disappears when we substitute historical trends or previous year’s performance targets for the targets. Moreover, boards of directors sometimes make further discretionary adjustments for the purpose of awarding incentive pay. We support Murphy and Jensen’s (2011) call to remove non-linearity in pay-performance relation and urge better disclosure to shareholders.

Keywords: Earnings management, Performance target, Annual incentive plan, Executive compensation

JEL Classification: G3, J31, J33

Suggested Citation

Kim, Daniel Sungyeon and Yang, Jun, Beating the Target: Performance Management Around the Annual Incentive Target (February 1, 2014). Kelley School of Business Research Paper No. 2014-19. Available at SSRN: https://ssrn.com/abstract=2389982 or http://dx.doi.org/10.2139/ssrn.2389982

Daniel Sungyeon Kim (Contact Author)

Peking University HSBC Business School ( email )

University Town
Shenzhen, Nanshan District 518055
China

Jun Yang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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