Abstract
This study investigates whether firms revise executive bonus compensation targets based on past performance. Studies in this area suffer from a lack of detailed information related to executive performance targets. Using mandatory disclosures of executive compensation information under the U.S. Securities and Exchange Commission’s new disclosure rules, this study provides the first large-sample evidence of bonus target ratcheting. There are three major findings: (1) Executive bonus targets ratchet and they ratchet asymmetrically; (2) the degree of target ratcheting and ratcheting asymmetry vary with firm executive equity incentives, investment opportunities, and executives’ time horizons; and (3) performance relative to bonus target is serially correlated.
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