The Role of Executive Cash Bonuses in Providing Individual and Team Incentives

72 Pages Posted: 10 Oct 2016 Last revised: 12 Nov 2018

See all articles by Wayne R. Guay

Wayne R. Guay

University of Pennsylvania - Accounting Department

John Kepler

University of Pennsylvania - Accounting Department

David Tsui

University of Southern California - Marshall School of Business

Date Written: August 22, 2018

Abstract

Given CEOs’ substantial equity portfolios, much recent literature on CEO incentives regards cash-based bonus plans as largely irrelevant, begging the question of why nearly all CEO compensation plans include such bonuses. We develop a new measure of bonus plan incentives, and document that performance sensitivities are much greater than prior estimates. We also test hypotheses regarding the role of bonuses in providing executives with individualized and team incentives. We find little evidence supporting the individualized incentives hypotheses, but consistent evidence that bonus plans appear to be used to encourage mutual monitoring and to facilitate coordination across the top management team as a whole.

Keywords: executive compensation, managerial incentives, pay-performance sensitivity

JEL Classification: G34, J33, M12

Suggested Citation

Guay, Wayne R. and Kepler, John and Tsui, David, The Role of Executive Cash Bonuses in Providing Individual and Team Incentives (August 22, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2849934 or http://dx.doi.org/10.2139/ssrn.2849934

Wayne R. Guay (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

John Kepler

University of Pennsylvania - Accounting Department ( email )

PA
United States

David Tsui

University of Southern California - Marshall School of Business ( email )

3660 Trousdale Parkway
Los Angeles, CA 90089
United States

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