Performance-Contingent Executive Compensation and Managerial Behavior

47 Pages Posted: 6 Nov 2014 Last revised: 10 Dec 2015

See all articles by John M. Bizjak

John M. Bizjak

Texas Christian University

Rachel M. Hayes

University of Utah - David Eccles School of Business

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business

Date Written: December 2015

Abstract

Recent regulation and legislation, along with the growing influence of compensation consultants and proxy advisors, have led to an increase in performance-contingent awards. A majority of these awards contain performance conditions tied explicitly to accounting measures. Both the structure of the awards and the opaqueness of award disclosures can provide incentives for earnings management. Our examination reveals no evidence of earnings management through discretionary accruals. In contrast, we find evidence of real activities management. Earnings management varies with accounting metric type, award disclosure opaqueness, and proximity of earnings to performance thresholds. Results are robust to accounting for endogeneity in performance-contingent awards. Our evidence suggests that recent trends in the structure and transparency of pay affect both the incentives for managing earnings and the form of earnings management.

Keywords: Performance-based awards, executive compensation, discretionary accruals, real earnings management, earnings management, CEO pay

JEL Classification: J33, M41, M52, M55

Suggested Citation

Bizjak, John M. and Hayes, Rachel M. and Kalpathy, Swaminathan L., Performance-Contingent Executive Compensation and Managerial Behavior (December 2015). Available at SSRN: https://ssrn.com/abstract=2519246 or http://dx.doi.org/10.2139/ssrn.2519246

John M. Bizjak

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-4260 (Phone)

Rachel M. Hayes

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Swaminathan L. Kalpathy (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

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