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High Non-GAAP Earnings Predict Abnormally High CEO Pay

36 Pages Posted: 6 Sep 2017  

Nicholas M. Guest

Massachusetts Institute of Technology (MIT) - Sloan 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: September 1, 2017

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. Moreover, contrary to management’s usual assertion that non-GAAP earnings more accurately convey a firm’s core earnings, we find that non-GAAP earnings do not better correlate with contemporaneous stock returns when compared to 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 justifying CEO pay that would otherwise not be supported by the firm’s stock price or GAAP earnings performance.

Keywords: Non-GAAP Earnings, CEO Compensation, Performance Evaluation

JEL Classification: M12, M41, M48, G34, G38

Suggested Citation

Guest, Nicholas M. and Kothari, S.P. and Pozen, Robert, High Non-GAAP Earnings Predict Abnormally High CEO Pay (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3030953

Nicholas Guest

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

100 Main Street
Cambridge, MA 02142
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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