Earnings Performance Targets in Annual Incentive Plans and Management Earnings Guidance

The Accounting Review, Forthcoming

64 Pages Posted: 14 Mar 2017 Last revised: 12 Sep 2022

See all articles by Xiumin Martin

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Hojun Seo

Purdue University - Krannert School of Management

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Daniel Sungyeon Kim

Chung-Ang University - College of Business & Economics

Jordan Martel

Indiana University Bloomington, Kelley School of Business

Date Written: March 11, 2017

Abstract

We study how corporate boards set earnings performance targets in CEOs’ annual incentive plans (AIPs) and the implications for strategic management earning guidance. We find that corporate boards rely on management and analyst information in setting the earnings performance targets, and the weight placed on each signal increases with its precision. We also find that management earnings guidance issued before compensation committee meetings (“event-window management forecast (MF)”) is more pessimistic than that issued by the same firm at other times. The pessimism in the event-window MF is more pronounced when the expected managerial benefits of having lower performance targets are greater. Ex post, the event-window MF pessimism is associated with higher bonus payouts to CEOs. We use a theoretical framework to illustrate how the use of earnings performance targets might drive our findings. This study highlights boards’ tradeoffs in designing executive compensation and the resulting managerial strategic disclosure.

Keywords: Annual Incentive Plans, Performance Targets, Management Earnings Guidance

JEL Classification: G34, M41, M52

Suggested Citation

Martin, Xiumin and Seo, Hojun and Yang, Jun and Kim, Daniel Sungyeon and Martel, Jordan, Earnings Performance Targets in Annual Incentive Plans and Management Earnings Guidance (March 11, 2017). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2931372 or http://dx.doi.org/10.2139/ssrn.2931372

Xiumin Martin

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Hojun Seo (Contact Author)

Purdue University - Krannert School of Management ( email )

403 W State St
West Lafayette, IN 47907
United States

Jun Yang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

Daniel Sungyeon Kim

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Jordan Martel

Indiana University Bloomington, Kelley School of Business ( email )

1275 E 10th St
Hodge Hall
Bloomington, IN 47405
United States

HOME PAGE: http://www.jordanmartel.com

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