Effect of accounting-based earnings attributes on CEO compensation

Abstract

Scope and Method of Study: This study explores how four accounting-based earnings attributes affect the relationship between accounting rate of return (ROA) and CEO compensation. In addition, it examines the effect of corporate governance on the use of the four earnings attributes. Two types of multiple linear regressions are used. First, each earnings attribute is included into the compensation models one at a time, Individual models. Second, the four earnings attributes are included into the models simultaneously, Simultaneous models.

Findings and Conclusions: The results from the Individual models illustrate that each earnings attribute, except for persistence, is a significant factor in CEO compensation, excluding salary. It can be implied that different types of compensation use different earnings attributes. Unlike the Individual models, the results from the Simultaneous models find that only predictability increases the relationships between change in ROA and compensation. Thus, compensation committees do not simply use four earning attributes simultaneously but they may combine them in certain ways before using them. This study uses two methods to combine earnings attributes: Index and PCA. The results for Index and PCA show that compensation committees increase the weight on ROA as a CEO performance measure when overall earnings attributes increase. However, this study cannot find any effect of corporate governance on the use of earnings attributes in CEO compensation.