Executive target bonuses and what they imply about performance standards

Raffi J. Indjejikian, Dhananjay Nanda

Research output: Contribution to journalArticle

70 Scopus citations

Abstract

We provide evidence that CEOs' and lower-level business unit executives' target bonuses are negatively associated with a proxy for measurement noise in accounting-based performance measures, and positively associated with proxies for firms' growth opportunities and the extent of executives' decision-making authority. Non-CEO executives' target bonuses are also positively associated with their CEO's target bonus. In addition, we compare executives' actual and target bonuses over two consecutive periods to draw inferences about how firms revise executives' performance standards. If firms adjust performance standards to fully reflect executives' past performance, then we expect an executive's chances of earning an above-target bonus to be independent of his past performance. We find evidence to the contrary; an executive is more likely to receive an abovetarget bonus if he received an above-target bonus in the prior year than if he did not. This suggests that firms do not adjust standards to fully reflect executives' past performance, consistent with agency-theoretic arguments that a firm can better motivate its executives if it discounts executives' past performance in setting their future compensation.

Original languageEnglish (US)
Pages (from-to)793-819
Number of pages27
JournalAccounting Review
Volume77
Issue number4
DOIs
StatePublished - Oct 2002
Externally publishedYes

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Keywords

  • Bonus plans
  • Incentive compensation
  • Performance standards
  • Targets

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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