Executive Bonus Target Ratcheting: Evidence from the New Executive Compensation Disclosure Rules
65 Pages Posted: 12 Aug 2014 Last revised: 1 Mar 2016
Date Written: February 02, 2016
This study investigates whether firms revise executive bonus compensation targets based on past performance. Studies in this area suffer from a lack of detailed information related to executive performance targets. Using mandatory disclosures of executive compensation information under the U.S. Securities and Exchange Commission’s new disclosure rules, this study provides the first large-sample evidence of bonus target ratcheting. There are three major findings: (1) Executive bonus targets ratchet and they ratchet asymmetrically; (2) the degree of target ratcheting and ratcheting asymmetry vary with firm executive equity incentives, investment opportunities, and executives’ time horizons; and (3) performance relative to bonus target is serially correlated.
Keywords: Executive compensation, annual bonus, performance targets, ratcheting
JEL Classification: M41; M21
Suggested Citation: Suggested Citation