Cash Compensation and Earnings' Components Around CEO Turnover: Does the Compensation Committee See Over the Horizon?

43 Pages Posted: 23 Jul 2003

See all articles by Mark R. Huson

Mark R. Huson

University of Alberta - Department of Finance and Statistical Analysis

Christine I. Wiedman

University of Waterloo

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: June 2003

Abstract

Managers in their terminal years have an incentive to manipulate earnings to enhance earnings based bonuses. We examine this horizon problem by considering the role of the compensation committee in setting terminal-year compensation. We predict that compensation committees are aware of the horizon problem and intervene when setting pay in terminal years. We find that the relation between cash compensation changes and discretionary accruals changes is significantly reduced. This finding is similar for both positive and negative discretionary accrual changes. Our findings suggest that compensation committees do not act naively when setting CEO compensation in the terminal year.

Keywords: horizon problem, compensation committee, discretionary accruals

JEL Classification: M41, M43, G34, J33

Suggested Citation

Huson, Mark R. and Wiedman, Christine I. and Wier, Heather A., Cash Compensation and Earnings' Components Around CEO Turnover: Does the Compensation Committee See Over the Horizon? (June 2003). Available at SSRN: https://ssrn.com/abstract=423541 or http://dx.doi.org/10.2139/ssrn.423541

Mark R. Huson

University of Alberta - Department of Finance and Statistical Analysis ( email )

4-20C Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2803 (Phone)
780-492-3325 (Fax)

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3053 (Phone)
780-420-3325 (Fax)

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