IFRS Adoption and Executive Compensation: Preliminary Canadian Evidence

Abstract

This study examines the associations between executive compensation and IFRS adoption. More specifically, we examine whether IFRS better reflects firms’ and managers’ performance. Based on a sample of 400 firms listed on the TSX with a December 31st year-end, we find that accounting-based pay for performance sensitivity is stronger in the year of IFRS adoption. We also find that executives earned $11.37 more for every $1,000 increase of accounting income under IFRS than under previous Canadian GAAP. This suggests that IFRS may be better at assessing managers’ stewardship. The executive compensation literature largely focuses on the association between compensation and financial performance measures. However, non-financial measures are used by boards to assess and reward senior management. The adoption of IFRS by Canadian firms in 2011 offers an opportunity to evaluate whether the chief financial officers (CFOs) were compensated for taking on the additional fiduciary duties of ensuring IFRS was appropriately adopted in time. Since IFRS is more likely to increase the CFO’s workload, we hypothesize that CFO total compensation increases in the year of IFRS adoption. Our results show that CFOs earned approximately $108,000 more in the year of IFRS adoption. In contrast, the chief executive officer’s (CEO) compensation does not change significantly in the year of IFRS adoption. We also find CFOs’ bonus relative to CEO bonus increased by more than 20% in the year of IFRS adoption. These absolute and relative compensation increases for the CFOs in the year of IFRS adoption are both statistically and economically significant.