Accounting Earnings and Executive Compensation: The Role of Earnings Persistence

Abstract

This study investigates whether relations between accounting earnings and executive compensation depend on earnings persistence. The analysis is informed by prior studies that link executive compensation with accounting earnings and those that link security returns with earnings persistence. We expect that the sensitivity of executive compensation to accounting earnings varies directly with earnings persistence. We also expect that the weights assigned to earnings levels and earnings changes vary with earnings persistence in predictable ways. Results for a cross- sectional analysis of cash compensation paid to CEO s of 712 U.S. firms are consistent with these expectations.

JEL Classification: J33, M41