High Non-GAAP Earnings Predict Abnormally High CEO Pay

42 Pages Posted: 6 Sep 2017 Last revised: 3 Jun 2018

Nicholas M. Guest

Cornell University - Samuel Curtis Johnson Graduate School of Management

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert Pozen

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: May 21, 2018

Abstract

Using the standard academic model of executive compensation, we document excessive CEO pay for the S&P 500 firms that report non-GAAP earnings that are much higher than their GAAP earnings. We also find that, on average, such firms have weak contemporaneous and future operating performance relative to other firms in the S&P 500. Moreover, evidence does not support management’s typical assertion that non-GAAP earnings more accurately convey a firm’s core earnings. Specifically, non-GAAP earnings do not correlate more highly with contemporaneous stock returns than GAAP net income or operating income. This latter finding confirms prior results that firms’ reporting of non-GAAP earnings does not mislead investors, maybe because firms are simultaneously required to report GAAP earnings and a reconciliation of the adjustments to GAAP earnings. Overall, our evidence suggests that, on average, boards of directors are influenced by large positive non-GAAP earnings adjustments in approving a level of CEO pay that is otherwise not supported by the firm’s stock price or GAAP earnings performance.

Keywords: Non-GAAP earnings, CEO pay, performance evaluation, corporate governance

JEL Classification: G14, G34, G38, M12, M41

Suggested Citation

Guest, Nicholas M. and Kothari, S.P. and Pozen, Robert, High Non-GAAP Earnings Predict Abnormally High CEO Pay (May 21, 2018). Available at SSRN: https://ssrn.com/abstract=3030953 or http://dx.doi.org/10.2139/ssrn.3030953

Nicholas M. Guest

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

314 Sage Hall
Ithaca, NY 14853
United States

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Robert Pozen

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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