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Earnings targets and annual bonus incentives

Indjejikian, Raffi J., Matĕjka, Michal, Merchant, Kenneth A. and Van der Stede, Wim A. (2014) Earnings targets and annual bonus incentives. Accounting Review, 89 (4). pp. 1227-1258. ISSN 0001-4826

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Identification Number: 10.2308/accr-50732

Abstract

We examine the extent to which firms use past performance as a basis for setting earnings targets in their bonus plans and assess the implications of such targets for managerial incentives. We find that high-profitability firms commonly decrease earnings targets when their managers fail to meet prior-year targets but rarely increase targets. Conversely, we find that low-profitability firms commonly increase earnings targets when their managers meet or exceed prior-year targets but rarely decrease targets. This targetrevision process yields a serial correlation in target difficulty—targets remain relatively easy (or difficult) through time. We also find that firms are reluctant to revise earnings targets below zero, resulting in an unusually high frequency of zero earnings targets that are abnormally difficult to achieve. Collectively, our findings suggest that firms incorporate past performance information into targets, yet they do so only to a limited extent. This is consistent with theoretical arguments that highlight the benefits of contractual commitments.

Item Type: Article
Official URL: http://aaajournals.org/
Additional Information: © 2014 American Accounting Association
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification: M - Business Administration and Business Economics; Marketing; Accounting > M0 - General
Sets: Departments > Accounting
Date Deposited: 21 Jul 2014 09:19
Last Modified: 20 Nov 2019 11:09
Funders: American Institute of Certified Public Accountants (AICPA)
URI: http://eprints.lse.ac.uk/id/eprint/58018

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