Bonus Payouts Research Articles

Earnings Performance Targets in Annual Incentive Plans and Management Earnings Guidance

ABSTRACTWe study how corporate boards set earnings performance targets in CEOs’ annual incentive plans (AIPs) and the implications for strategic management earning guidance. We find that corporate boards rely on management and analyst information in setting the earnings performance targets, and the weight placed on each signal increases with its precision. We also find that management earnings guidance issued before compensation committee meetings (“event-window management forecast (MF)”) is more pessimistic than that issued by the same firm at other times. The pessimism in the event-window MF is more pronounced when the expected managerial benefits of having lower performance targets are greater. Ex post, the event-window MF pessimism is associated with higher bonus payouts to CEOs. We use a theoretical framework to illustrate how the use of earnings performance targets might drive our findings. This study highlights boards’ tradeoffs in designing executive compensation and the resulting managerial strategic disclosure.JEL Classifications: G34; M41; M52.

Who is paid in pay-for-performance? Inequalities in the distribution of financial bonuses amongst health centres in Zimbabwe.

Although pay-for-performance (P4P) schemes have been implemented across low- and middle-income countries (LMICs), little is known about their distributional consequences. A key concern is that financial bonuses are primarily captured by providers who are already better able to perform (for example, those in wealthier areas), P4P could exacerbate existing inequalities within the health system. We examine inequalities in the distribution of pay-outs in Zimbabwe’s national P4P scheme (2014–2016) using quantitative data on bonus payments and facility characteristics and findings from a thematic policy review and 28 semi-structured interviews with stakeholders at all system levels. We found that in Zimbabwe, facilities with better baseline access to guidelines, more staff, higher consultation volumes and wealthier and less remote target populations earned significantly higher P4P bonuses throughout the programme. For instance, facilities that were 1 SD above the mean in terms of access to guidelines, earned 90 USD more per quarter than those that were 1 SD below the mean. Differences in bonus pay-outs for facilities that were 1 SD above and below the mean in terms of the number of staff and consultation volumes are even more pronounced at 348 USD and 445 USD per quarter. Similarly, facilities with villages in the poorest wealth quintile in their vicinity earned less than all others—and 752 USD less per quarter than those serving villages in the richest quintile. Qualitative data confirm these findings. Respondents identified facility baseline structural quality, leadership, catchment population size and remoteness as affecting performance in the scheme. Unequal distribution of P4P pay-outs was identified as having negative consequences on staff retention, absenteeism and motivation. Based on our findings and previous work, we provide some guidance to policymakers on how to design more equitable P4P schemes.

Earnings performance measures and CEO turnover: Street versus GAAP earnings

Prior research reports that analysts focus on street earnings, which are measures that typically exceed GAAP earnings. Using a sample of CEO turnovers from 1993 to 2016 we show that the likelihood and speed of forced CEO turnover - but not voluntary turnover - are higher when analysts exclude income-decreasing items. The association between exclusions and forced turnovers is particularly pronounced for high magnitude exclusions. We also show that greater street exclusion of income-decreasing items, the lower CEO bonus payouts. We find that boards use audited and more conservative GAAP earnings in evaluating and dismissing CEOs, except in the recent period of 2010–2016.

Setting Financial Performance Thresholds, Targets, and Maximums in Bonus Plans

ABSTRACTThis study uses both archival and field evidence from one multidivisional firm to examine how the three commonly used financial performance standards used to calibrate short-term bonus payouts—thresholds, targets, and maximums—are set. The setting of the standards results from complex negotiating processes. Consistent with prior research, we find that performance targets—the middle parameter—are set to be exceeded by most organizational entities. Contrary to some existing normative theory, actual performance is often outside the incentive zone, which is defined by the range between the maximum and threshold. The reasons for this include desires to raise managers' aspiration levels, concerns about bonus payment affordability, and trade-offs in gaining manager commitment to the standards. Often the target is not in the middle of the incentive zone. We identify three additional factors that provide partial explanations of where and why these standards are set where they are: employee risk mitigation, desire for cross-entity equity, and manager operating style.Data Availability: Confidentiality agreements prevent the authors from distributing the data.

Pessimistic Earnings Guidance Before Annual Incentive Plan Approval

We study how compensation committees set CEOs’ earnings performance goals in annual incentive plans (AIPs) and their implications for managers’ strategic earning guidance behavior. We find corporate boards rely on earnings forecasts provided by both financial analysts and managers in setting performance goals. Also, the weight boards place on a manager’s earnings forecasts increases with managers’ information advantage over analysts. We next examine the implications of this process for management earnings guidance. We find that the forecasts issued by management ahead of compensation committee meetings (“event-window guidance”) are more pessimistic than those issued at other times. This pessimism in event-window earnings guidance is present when performance goals are linked to earnings-based measures such as Earnings-Per-Share (EPS), but not when they are linked to revenue, suggesting that pessimistic event-window guidance is likely motivated by a desire to depress earnings performance goals. Furthermore, pessimism in event-window guidance is associated with higher bonus payouts as well as total payouts to CEOs. Lastly, meeting or beating performance goals significantly reduces the likelihood of forced CEO turnover. Overall, this study provides insights into the process of setting managerial performance goals and management’s strategic disclosure behavior arising from this process.

Compensation in the Post‐FIN 48 Period: The Case of Contracting on Tax Performance and Uncertainty

AbstractAcademic and anecdotal evidence indicates that incentive systems often provide short‐term payouts without regard for long‐term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance‐based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post‐FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre‐FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post‐FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post‐FIN No. 48 period.

Compensation in the Post-FIN 48 Period: The Case of Contracting on Tax Performance and Uncertainty

Academic and anecdotal evidence indicates that incentive systems often provide short-term payouts without regard for long-term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance-based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post-FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre-FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post-FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post-FIN No. 48 period.

Contracting with Uncertain Motives

I examine an agency model where the principal has either a legitimate or an illegitimate motive for revising the incentive contract, whereas the agent does not observe the principal's motive and creates more organizational frictions as he becomes more suspicious that the principal is ill-intentioned. Such doubt about the principal's motive increases the cost of using high-powered incentive schemes with a substantial discretionary component. To provide near-efficient incentives to the agent and mitigate doubts about her motive, the principal either adopts carefully designed rigid policies such as efficiency wages, seniority-based promotions and infrequent bonus payouts, or uses complementary practices to distinguish her motive and restore the efficiency of high-powered incentive plans.

Disciplinary measures in response to restatements after Sarbanes–Oxley

This study examines whether boards discipline CEOs and CFOs more severely for accounting restatements after passage of the Sarbanes–Oxley Act (SOX). The disciplinary actions I focus on are job termination and reductions in bonus payouts. Boards have incentive to take the highly visible action of terminating a manager to satisfy demands by outsiders for more vigilant corporate governance after SOX. However, terminating an executive entails the risk of hiring an inferior replacement and other costs. Imposing these costs on the firm and shareholders may not be justified after SOX because the severity of the restatements declines significantly. Despite the pressure on boards to appear vigilant, I find that when disciplining CEOs after SOX, boards gravitate away from termination and toward bonus penalties, a development commensurate with the less severe restatements of the post-SOX period. In contrast, boards appear to strengthen disciplinary action against CFOs after SOX despite the decline in restatement severity.

Executive Bonus and Firm Performance in the UK

As part of good corporate governance in general, executive bonuses are supposed to motivate senior managers to raise shareholder value; successive governance reforms since the 1995 Greenbury Report have tried to support remuneration committees to that end in the design of executive pay packages. However, well-intentioned regulations calling for the attachment of ‘challenging and stretching’ performance conditions to executive pay can work both ways. Yes, they can strengthen pay/performance relations, but attempts to make performance conditions stretching or ‘hard’ can also involve more bureaucracy and ‘camouflage’ opportunities for executives effectively to guarantee themselves higher incomes through ‘soft’ conditions. This paper addresses these possibilities, and reports on an analysis of executive bonuses in the UK from 2001 to 2003 that focuses on the question of whether the aggregate value and transparency of bonus schemes are associated with higher total shareholder returns. Bonus scheme complexity turns out to be the only dimension of bonus transparency that is associated with bonus pay-outs, tending to increase the value of pay-outs but without any associated increase in shareholder returns.

Evaluation of Subjectivity in Incentive Pay

The study aims to investigate the determinants of subjective bonus payouts in the UK financial industry. Bonuses are increasingly linked to wider business goals, such as quality and customer service, firm reputation and employee hiring and retention policies, thus replacing the traditional focus on output or profit measures. A new conceptual work on subjectivity is used to evaluate these bonus practices. Results indicate that a variety of contextual factors have influenced the firms to make greater use of subjectivity in bonus payouts. Of these, organizational interdependency appeared to be the most forceful factor, followed by management’s strategic focus, long-term investment in intangibles, economic constraints, performance target difficulty, and competition. The analysis suggests that subjectivity acts as a mechanism that aligns the interests of individual employees with the firm’s performance goals. The study also draws attention to the costs of subjectivity in performance evaluation.

Bonuses and investment in intangibles

Traditional analyses of bonuses have focused on performance measures such as output or profit as the sole determinant of bonus pay plans. However, com-panies now use bonuses for a variety of purposes, including employee recruit-ment and retention and to obtain better outcomes in quality and customer service. These trends suggest that a host of strategic considerations influence company decisions about bonus payouts, ranging from traditional concerns such as employee performance to the company’s reputation among prospective employ-ees and customers, stakeholder influence, and support for technological and organizational change as part of company plans to develop intangible assets. Using data from 2000 ELCS (European Labor Cost Survey), I investigate the determinants of bonus payouts, in particular how a company’s concerns about intangible assets affect its bonus outlays. Consistent with a growing body of evidence, both individual and workplace effects are important in explaining the variation in the incidence of bonus payments. Specifically, the findings suggest that human capital investments are positively related to bonus payments.

Subjective performance measures in bonus payouts

Performance ImprovementVolume 45, Issue 8 p. 34-40 Research Article Subjective performance measures in bonus payouts Tahir M. Nisar PhD, Tahir M. Nisar PhD Tahir M. Nisar: , PhD, is a lecturer in the School of Management at the University of Southampton. He obtained his PhD degree from the London School of Economics. Tahir has published in leading academic journals, including the Journal of Labor Research and the International Journal of Human Resource Management. He is currently researching various types of executive compensation schemes and their impacts on company performance. Tahir may be reached at t.m.nisar@soton.ac.uk.Search for more papers by this author Tahir M. Nisar PhD, Tahir M. Nisar PhD Tahir M. Nisar: , PhD, is a lecturer in the School of Management at the University of Southampton. He obtained his PhD degree from the London School of Economics. Tahir has published in leading academic journals, including the Journal of Labor Research and the International Journal of Human Resource Management. He is currently researching various types of executive compensation schemes and their impacts on company performance. Tahir may be reached at t.m.nisar@soton.ac.uk.Search for more papers by this author First published: 13 October 2006 https://doi.org/10.1002/pfi.4930450808Citations: 3 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume45, Issue8September 2006Pages 34-40 RelatedInformation

Is it all in the Timing? The Practice of Bonus Payments in the United Kingdom

Bonuses are increasingly linked to wider business goals, replacing the traditional focus on output or profit measures. The evidence also shows that companies make awards to coincide with payments made by competitors to raise their profile among prospective employees and customers. The timing of bonus payments has thus become a strategic consideration in many markets in recent years. These trends suggest that there are a host of factors that contribute to companies' decisions about bonus payouts. This article uses case studies of two U.K. banks to show that companies pay bonuses for a variety of purposes, ranging from employee performance and productivity to wider company goals, such as company reputation, stakeholder influence and employee hiring and retention policies. The article argues that current bonus pay practices are best understood as a value-added strategy, as various trade-offs are required before a company can expect to benefit from its employee rewards and benefit strategy.

Performance standards in incentive contracts

Research in incentives has focused on performance measures and pay-performance sensitivities but has largely ignored the “performance standard”, which generates important incentives whenever plan participants can influence the standard-setting process. “Internally determined” standards are directly affected by management actions in the current or prior year, while “externally determined” standards are less easily affected. I show that companies choose external standards when prior performance is a noisy estimate of contemporaneous performance. In addition, companies using budget based and other internally determined performance standards have less-variable bonus payouts, and are more likely to smooth earnings, than companies using externally determined standards.

Performance Standards in Incentive Contracts

Research in incentives has focused on performance measures and pay-performance sensitivities but has largely ignored a third significant dimension: the performance standard. Performance standards generate important incentives whenever plan participants can influence the standard-setting process. I describe management bonus contracts and the role of performance standards, distinguishing between standards that are directly affected by management actions in the current or prior year, and standards that are less easily affected. I show that companies choose external standards when prior-year performance is a noisy estimate of contemporaneous performance. In addition, companies using budget-based and other internally determined performance standards have less-variable bonus payouts, and are more likely to smooth earnings from year to year, than companies using externally determined standards.

Factors Influencing Organizational Performance in Gainsharing Programs

Using survey data from managers at 269 establishments in the United States and Canada, this article examines factors influencing outcomes of gainsharing. The ordered probit analyses generally indicated that these outcomes have significant associations with employee involvement, bonus payouts, employee bonus share, bonus group size, consultant involvement, the administration of employee votes, labor intensity, market situation, establishment's financial condition, the average seniority level of employees, union status, and union support.