Cash-based bonus plans as a strategic communication, coordination and commitment mechanism

16 Pages Posted: 16 Aug 2021

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Date Written: August 12, 2021

Abstract

Over the last two decades, executive compensation research has focused primarily on equity-based pay and incentives emanating from executives’ firm-specific equity portfolios, while generally ignoring cash-based bonus plans as a second order effect. Exploiting access to new data sources, there has been a revival of interest by accounting researchers in more deeply understanding the value adding roles played by bonus plans. Earlier research viewed accounting measures in bonus plans through the lens of effort incentives-risk premium trade-offs derived from classical principal-agent theory. In contrast, the recent literature emphasizes the idea that cash-based bonus plans play an important communication role in which a board’s performance measure choices reveal to outsiders the firm’s commitment to specific strategic objectives and facilitate the coordination of behavior across executives inside the firm. Public observability of bonus plans then provides a basis for investors and competitors to assess a firm’s strategic direction, and for investors to hold managers accountable for strategy execution. Building on my discussion of Bloomfield, Gipper, Kepler and Tsui (2021) in the 2020 Journal of Accounting and Economics Conference, my objective in this paper is to synthesize and critique key results from this recent literature and offer ideas for future research.

Keywords: Executive Compensation, bonus plans, strategic communication, coordination, commitment

JEL Classification: M41, M12, G34, J33

Suggested Citation

Bushman, Robert M., Cash-based bonus plans as a strategic communication, coordination and commitment mechanism (August 12, 2021). Journal of Accounting & Economics (JAE), Forthcoming, Kenan Institute of Private Enterprise Research Paper No. 2021-08, Available at SSRN: https://ssrn.com/abstract=3904377

Robert M. Bushman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

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