High Non-GAAP Earnings Predict Abnormally High CEO Pay
38 Pages Posted: 6 Sep 2017 Last revised: 18 Jan 2018
Date Written: January 17, 2018
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 would otherwise not be 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
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