High Non-GAAP Earnings Predict Abnormally High CEO Pay
54 Pages Posted: 6 Sep 2017 Last revised: 9 Jan 2019
Date Written: January 2, 2019
We document excessive CEO pay of almost two million dollars per year, on average, for the S&P 500 firms that report high non-GAAP earnings relative to GAAP earnings. These firms pay their CEO excessively despite (i) weak contemporaneous and future operating performance and (ii) lower contemporaneous stock returns relative to other firms in the S&P 500. As in prior research, we do not find that non-GAAP earnings mislead investors, nor do we find support for managers’ typical assertion that non-GAAP earnings more accurately convey core performance. Specifically, non-GAAP earnings do not correlate more highly with contemporaneous stock returns or future performance than GAAP net income or operating income. Overall, our evidence suggests large non-GAAP earnings adjustments influence some boards of directors in approving a level of CEO pay that is otherwise not supported by the firm’s stock price or GAAP earnings performance. We also note that although excessive pay for firms reporting high non-GAAP earnings is about 16% of total pay, the bulk of the pay represents reward for performance. Still, an economically meaningful fraction of CEO pay appears to be attributable to opportunistic non-GAAP reporting.
Keywords: Non-GAAP earnings, CEO pay, performance evaluation, corporate governance
JEL Classification: G14, G34, G38, M12, M41
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