IFRS and the Use of Accounting-Based Performance Measures in Executive Pay

Abstract

We examine the effect of IFRS on the use of accounting-based performance measures for evaluating and rewarding managers. We show that post-IFRS firms decrease the weight of Earnings-per-Share (EPS) based performance measures in CEO pay contracts. We provide indications that IFRS add “noise” to accounting numbers which, based on optimal contracting theory, makes reported earnings less useful for evaluating managerial performance. We argue that this is mainly due to the adoption of “fair value” accounting (FVA), which potentially makes accounting numbers more value-relevant, but also more volatile and sensitive to market movements. This study suggests that, whilst under IFRS accounting earnings could be more useful for stock market valuation purposes, this is achieved at the expense of other purposes that accounting serves, i.e., stewardship/performance contracting. Our findings suggest that when accounting numbers are designed to conform more closely to market values, they become less able to provide information over what is complementary to market values for evaluating managerial performance.