Earnings per Share Goals and CEO Incentives
60 Pages Posted: 18 Feb 2017 Last revised: 28 Jul 2020
Date Written: July 25, 2020
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: Suggested Citation