High Non-GAAP Earnings Predict Abnormally High CEO Pay

54 Pages Posted: 6 Sep 2017 Last revised: 9 Jan 2019

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, 2019

Abstract

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

Suggested Citation

Guest, Nicholas M. and Kothari, S.P. and Pozen, Robert, High Non-GAAP Earnings Predict Abnormally High CEO Pay (January 2, 2019). 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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