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The treatment of special items in determining CEO cash compensation

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  • James Potepa

    (The George Washington University)

Abstract

Prior literature documents that CEOs are rewarded for any positive component of income and are partially shielded from negative special items. However, the incidence of and rules pertaining to nonrecurring items significantly changed over the last two decades, calling for a reassessment of earlier research. This paper finds that executives now benefit less from positive nonrecurring items and are penalized more for negative special items, compared to earlier periods. The predictive value of the components of income helps explain this shift. Hand-collected data indicates that compensation committees are more likely to include a component of income that can predict future earnings in their CEO bonus performance measures. Changes in the predictive value of the nonrecurring components of income over time contribute to shifts in their treatment in calculating CEO pay.

Suggested Citation

  • James Potepa, 2020. "The treatment of special items in determining CEO cash compensation," Review of Accounting Studies, Springer, vol. 25(2), pages 558-596, June.
    • Handle: RePEc:spr:reaccs:v:25:y:2020:i:2:d:10.1007_s11142-019-09523-x
    DOI: 10.1007/s11142-019-09523-x
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    References listed on IDEAS

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    Cited by:

    1. Hangsoo Kyung & Jeff Ng & Yong George Yang, 2021. "Does the use of non‐GAAP earnings in compensation contracts lead to excessive CEO compensation? Efficient contracting versus managerial power," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 841-868, May.
    2. Bushman, Robert, 2021. "Cash-based bonus plans as a strategic communication, coordination and commitment mechanism," Journal of Accounting and Economics, Elsevier, vol. 72(2).
    3. Bloomfield, Matthew & Gipper, Brandon & Kepler, John D. & Tsui, David, 2021. "Cost shielding in executive bonus plans," Journal of Accounting and Economics, Elsevier, vol. 72(2).
    4. Dirk E. Black & Ervin L. Black & Theodore E. Christensen & Kurt H. Gee, 2022. "Comparing Non-GAAP EPS in Earnings Announcements and Proxy Statements," Management Science, INFORMS, vol. 68(2), pages 1353-1377, February.
    5. Asher Curtis & Valerie Li & Paige H. Patrick, 2021. "The use of adjusted earnings in performance evaluation," Review of Accounting Studies, Springer, vol. 26(4), pages 1290-1322, December.
    6. Rong Huang & Carol Marquardt & Bo Zhang, 2023. "Revenue-expense matching and performance measure choice," Review of Accounting Studies, Springer, vol. 28(3), pages 1690-1720, September.

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