Earnings per Share Goals and CEO Incentives

60 Pages Posted: 18 Feb 2017 Last revised: 28 Jul 2020

See all articles by Chris Armstrong

Chris Armstrong

University of Pennsylvania - Accounting Department

Jacky Chau

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Christopher D. Ittner

University of Pennsylvania - Accounting Department

Jason J. Xiao

University of Rochester - Simon Business School

Date Written: July 25, 2020

Abstract

We examine differences in CEO achievement of EPS goals set separately through analyst forecasts and firm bonus plans. Having different goals for the same performance metric enables us to assess their relative importance in incentivizing CEOs. We find CEOs frequently achieve analyst forecasts, but rarely achieve bonus goals exceeding the forecast. Despite lower compensation risk accompanying easier goals, we also find that bonus goals set below forecasts are associated with greater pay, suggesting the use of easier goals to compensate CEOs while maintaining the appearance of pay-for-performance. The results highlight the importance of considering both sets of performance goals simultaneously when evaluating their incentive effects.

Keywords: Earnings per share (EPS); earnings targets; CEO incentives; bonus contracts; analyst forecasts; meet or beat

JEL Classification: M12; M40; M41; J33

Suggested Citation

Armstrong, Chris S. and Chau, Yuen-Kit and Ittner, Christopher D. and Xiao, Jason J., Earnings per Share Goals and CEO Incentives (July 25, 2020). Simon Business School Working Paper No. FR 17-09, Available at SSRN: https://ssrn.com/abstract=2919478 or http://dx.doi.org/10.2139/ssrn.2919478

Chris S. Armstrong

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Yuen-Kit Chau

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

Jason J. Xiao (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
606
Abstract Views
3,217
rank
48,537
PlumX Metrics