GBRJ's-2018 Geneva Conference Proceedings(July 9-11, 2018) (original) (raw)

Although CEO bonus plans traditionally use net income as the standard performance measure, there is an increasing trend that CEOs influence directors to adopt alternative non-GAAP performance metrics in setting bonuses. In this study, we analyze the managerial consequences of this alternative bonus contract design in the Real Estate Investment Trusts (REITs) industry. REITs provide a unique setting since most firms have been using FFO, an industry-specific non-GAAP performance measure, rather than net income, to determine CEO bonuses. Essentially, FFO consists of two components: net income, which is a GAAP measure, and a nonGAAP component that includes adjustments from net income made by firms. We examine to what extent CEO bonus arises as the result of manipulating these components. We also examine whether regulatory standards related to non-GAAP reporting and bonus disclosures are effective in mitigating such manipulation. Lastly, we analyze if good corporate governance constrains...

We show that earnings manipulation destroys incentives within the corporate hierarchy. In the model, top management has incentives to over-report earnings. An insider, for instance, a division manager may gain evidence about over-reporting. We show that the division manager is more likely to have evidence, when the performance of her own division is low. Top management wants to prevent information leakage to the outside world. Hence, when the division manager threatens to blow the whistle, top management pays her a bribe. As this occurs when division output is low, the wedge between payments in high and low states of nature decreases. Earnings manipulation therefore undermines incentives to exert effort and destroys value. We show that earnings manipulation is more likely to occur in flatter hierarchies; we also discuss implications of the auditing and whistle-blowing regulations of the Sarbanes-Oxley Act.

This study analyzes the effect of bonus compensation on real earnings management, with the audit committee effectiveness as a moderating variable in manufacturing companies in Indonesia. The sample of this research is manufacturing companies listed on the Indonesia Stock Exchange from 2018 to 2020. The research sample was selected by the purposive sampling method. Hypothesis testing is done by using panel data regression and Moderated Regression Analysis (MRA). The results showed that bonus compensation had a positive effect on real earnings management, while the effectiveness of the audit committee did not weaken the effect of bonus compensation on real earnings management. The findings of this study provide an overview to the company's stakeholders that bonus compensation is one of the factors that motivates company management to practice earnings management, especially earnings management related to the company's real activities. In addition, this study also provides an overview of the effectiveness of the implementation of corporate governance mechanisms in the sample companies, in particular the ineffectiveness of the supervisory function related to earnings management practices carried out by the audit committee.

Arising from the principal-agent consideration, Jensen and Murphy (1990b) studied the pay-performance sensitivity (including pay, options, stockholdings, and dismissal) for chief executive officers (CEOs) in the 1980s. They found that CEO wealth changes 3.25forevery3.25 for every 3.25forevery1,000 change in shareholder wealth. In this study, we revisit the issue of the linkage between CEO pay and performance but with the difference that we only include observable measures in the pay-performance sensitivity estimate. Our data on executive compensation stems from the ExecuComp database on S&P 1500 firms, and the performance data from the Center for Research in Security Prices (CRSP) database (total: 23,737 firm-year observations). We find that CEO wealth changes 5.34forevery5.34 for every 5.34forevery1,000 change in shareholder wealth. Almost all of this sensitivity is attributed to compensation through stock options and the CEO’s inside stockholdings. Today, the incentives generated by stock options have increased thirteen tim...