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

Forthcoming at The Accounting Review

60 Pages Posted: 6 Sep 2017 Last revised: 2 Mar 2022

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 13, 2022

Abstract

CEOs of S&P 500 firms that report high non-GAAP earnings relative to GAAP earnings receive substantial unexplained pay. Crucially, this result remains even after controlling for the level of non-GAAP and GAAP earnings. These firms are relatively poor performers (i.e., low GAAP earnings and stock returns) and have less powerful CEOs, consistent with non-GAAP earnings being used as justification when high executive pay is more likely to cause outrage. Additionally, despite the lower GAAP and return performance, these firms are more likely to beat the earnings targets specified in their compensation plans, which likely increases investors’ perceptions of core operating earnings and reduces outrage. Indeed, these firms face less dissent from shareholders and proxy advisors, and no additional media scrutiny. Our evidence suggests that the fraction of CEO pay that seems attributable to opportunistic non-GAAP reporting, while limited, is economically meaningful.

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 13, 2022). Forthcoming at The Accounting Review, 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 )

342 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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