Why Do Large Positive Non-GAAP Earnings Adjustments Predict Abnormally High CEO Pay?

54 Pages Posted: 6 Sep 2017 Last revised: 30 Jan 2020

See all articles by Nicholas M. Guest

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: January 2, 2020

Abstract

CEOs of S&P 500 firms that report high non-GAAP earnings relative to GAAP earnings receive more than $600 thousand in unexplained pay. The abnormally high pay appears even after controlling for the level of non-GAAP earnings and despite relatively weak GAAP performance and low returns. Additionally, these firms are more likely to beat the earnings targets specified in their compensation plans and their CEOs have less influence over the board of directors, consistent with managerial opportunism explaining the abnormal pay. Overall, our evidence suggests large non-GAAP earnings adjustments influence boards of directors in approving CEO pay that is otherwise not supported by the firm’s fundamental performance. We also note that abnormal pay is about 5% of the total, which means the bulk of the pay likely 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

Suggested Citation

Guest, Nicholas M. and Kothari, S.P. and Pozen, Robert, Why Do Large Positive Non-GAAP Earnings Adjustments Predict Abnormally High CEO Pay? (January 2, 2020). 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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