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The real effects of financial reporting on pay and incentives

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  • John E. Core

Abstract

This paper discusses two real effects of financial reporting on pay and incentives: (1) Better earnings leads to better incentives, and (2) If pay is mismeasured, pay can be misused. The first real effect follows from the fact that incentives are often based on earnings, and the effectiveness of earnings-based incentives is positively related to the quality of earnings. Greater use of earnings in incentives provides better incentives at a lower cost. The second real effect has to do with how well the accounting system measures the expense of various pay components. Complex calculations are required to value complex pay components such as options, post-employment benefits, and performance-vested equity, and these calculations have historically not been done correctly. The incorrect accounting leads to these pay components being misused. I conclude by discussing how accounting and disclosure of pay and incentives can be improved.

Suggested Citation

  • John E. Core, 2020. "The real effects of financial reporting on pay and incentives," Accounting and Business Research, Taylor & Francis Journals, vol. 50(5), pages 448-469, July.
    • Handle: RePEc:taf:acctbr:v:50:y:2020:i:5:p:448-469
    DOI: 10.1080/00014788.2020.1770931
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    Cited by:

    1. Do, Truc & Zhang, Huai & Zuo, Luo, 2022. "Rocking the boat: How relative performance evaluation affects corporate risk taking," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    2. Cao, Zhangfan & Chen, Steven Xianglong & Lee, Edward, 2022. "Does business strategy influence interfirm financing? Evidence from trade credit," Journal of Business Research, Elsevier, vol. 141(C), pages 495-511.

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