Earnings per Share Goals and CEO Incentives

58 Pages Posted: 18 Feb 2017 Last revised: 30 Jan 2019

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: January 28, 2019

Abstract

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

Armstrong, Chris S. and Chau, Yuen-Kit and Ittner, Christopher D. and Xiao, Jason J., Earnings per Share Goals and CEO Incentives (January 28, 2019). 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

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