CEO Compensation Incentives and Non-GAAP Earnings Disclosures

• In Event: Executive Compensation and Financial Reporting

Abstract

This paper explores how CEO compensation incentives, horizon, and experience influence non-GAAP earnings disclosures. We find that both long-term performance plans and bonus plans are associated with an increased likelihood that a CEO will report an adjusted (non-GAAP) earnings metric. We also find that long-term plan incentives curtail the likelihood of aggressive non-GAAP reporting. Since, all CEOs are not the same, we also examine how CEO compensation incentives, horizon, and experience interact to influence non-GAAP reporting. We find that older CEOs, who are closer to retirement, are less likely to report non-GAAP earnings, but when they do, they report non-GAAP earnings that exclude larger amounts of recurring expense items, consistent with short-termism. However, older CEOs with strong long-term plan incentives and weak bonus plan incentives are less likely to report non-GAAP earnings aggressively. Additionally, for a sub-sample of firms for which compensation contracts in proxy filings explicitly state that managers can or will be evaluated based on non-GAAP metrics, we find less opportunistic non-GAAP reporting. This evidence suggests that boards may explicitly define adjusted performance metrics in compensation contracts in order to reign in CEOs’ ability to define their own non-GAAP numbers. Overall, our results are consistent with boards’ providing long-term incentives to CEOs to protect against short-termism in non-GAAP reporting decisions.

Authors

• Dirk E Black, Dartmouth College

• Ervin L Black, Brigham Young University

• Theodore E Christensen, Brigham Young University

• Kurt H Gee, Stanford University