Earnings per Share Goals and CEO Incentives
58 Pages Posted: 18 Feb 2017 Last revised: 30 Jan 2019
Date Written: January 28, 2019
We examine the frequency with which CEOs achieve analysts’ earnings per share (EPS) forecasts and the EPS goals in their annual cash bonus plans. The presence of different bonus and market-related goals for the exact same performance measure allows us to assess the relative importance of these goals as sources of CEOs’ incentives, as revealed through their likelihood of achievement.We find that CEOs are far more likely to just meet their analyst forecasts than to just meet any of their bonus plan EPS goals. Moreover, although most firms achieve the consensus analyst forecast, they tend to meet only those bonus goals that are no more difficult than the forecast, and rarely achieve bonus goals that exceed the forecast. In addition, CEOs with bonus EPS goals that are less challenging than the analyst forecast tend to receive higher than expected total annual compensation despite the lower compensation risk associated with the easier bonus goals. Our results suggest that CEOs have stronger incentives to achieve their market-based EPS goals than their internal bonus plan EPS goals.
Keywords: Earnings per share (EPS); earnings targets; CEO incentives; bonus contracts; analyst forecasts; meet or beat
JEL Classification: M12, M40, M41
Suggested Citation: Suggested Citation