Cash Bonuses Research Articles

Earnings Smoothing, Cash Flow Volatility, and CEO Cash Bonus

Prior studies generally relate managers’ decisions to smooth earnings to their desire to maximize their overall compensation and to smooth their consumption. However, earnings smoothing could also be driven by the firm’s expected benefits from reporting a smooth earnings stream. Our paper provides empirical support for the latter explanation of earnings smoothing. Specifically, we find that while CEO bonus on average increases with earnings smoothing, the increase is larger when the firm’s cash flow volatility is higher. Further, CEO bonus is shielded from the negative effects of lower earnings arising from the need to report a smoother earnings stream.

Which Pay for What Performance? Evidence from Executive Compensation in Germany and the United States

This paper analyzes executive compensation in German and U.S. corporations for the period 2005-2009 including the financial crisis. We analyze the impact of stock market performance and accounting-based measures of firm performance on different compensation components. We find that only firm earnings explain total executive compensation in both samples while stock market performance does not. Cash bonus payments of German executives are explained by firm earnings and not by stock returns while U.S. bonuses are also determined by stock returns. Moreover, the sensitivity of cash bonuses to firm performance depends on firm risk and firm size. We also provide evidence that firms choose performance measures with low volatility. Finally, we find that pay-performance sensitivities are higher in the U.S. than in Germany, but have no robust explanation how long-term compensation such as company stock and options is granted in either country.

CEO Bonus Compensation and Bank Default Risk: Evidence from the U.S. and Europe

We investigate the link between the incentive mechanisms embedded in CEO cash bonuses and the riskiness of banks. For a sample of U.S. and European banks, we employ the Merton distance to default model to show that increases in CEO cash bonuses lower the default risk of a bank. However, we find no evidence of cash bonuses exerting a risk-reducing effect when banks are financially distressed or when banks operate under weak bank regulatory regimes. Our results link bonus compensation in banking to financial stability and caution that attempts to regulate bonus pay need to tailor CEO incentives to the riskiness of banks and to regulatory regimes.

Executive compensation and goodwill recognition under IFRS: Evidence from European mergers

Based on principal agent theory we posit that managers account for a business combination opportunistically by recognizing goodwill in excess of its economic determinants. We examine the relationship between CEOs’ short-term cash bonuses and the amount of goodwill recognized in IFRS acquisitions. We find that with increasing cash bonus intensity managers recognize more goodwill. More detailed analysis indicates that this relationship is not a linear one. Instead, there seems to be a corridor in which CEOs are susceptible to the incentive given by bonus payments. In particular, the relationship seems to be fulfilled only for CEOs whose cash bonus is between 150% and 200% of their base salary prior to the acquisition. Our findings have an implication for companies that bonus caps should be introduced to limit CEOs’ bonuses to a given percentage of their base salary. By doing so, they may re-align shareholders’ and managers’ interests and avoid an increased impairment risk in the future.

Corporate Governance and the CEO Pay-Performance Link: Australian Evidence

We examine the influence of corporate governance mechanisms, namely blockholdings and board structure, on CEO pay-performance sensitivity in listed Australian firms. Results highlight blockholders’ role in shaping observed pay-performance associations and their impact varying with their independence and relative magnitude of ownership. Monitoring blockholders increase the sensitivity of long-term at-risk pay to performance, better aligning manager and shareholder interests. However, consistent with a shorter investment horizon, insider blockholders increase (decrease) the responsiveness of cash bonuses (long-term at-risk pay). Finally, consistent with them affording less effective monitoring, larger boards raise (lower) the sensitivity of known pay (long-term at-risk pay) to performance.

Your Governance or Mine?

In response to criticism directed at the resource sector's corporate governance, this paper examines the corporate governance and underlying firm characteristics of resource development stage entities (DSEs) relative to a size-matched sample of non-resource firms. We find that resource DSEs have different governance characteristics in the measures of board independence, chair/CEO duality and CEO cash bonuses. Furthermore, there are differences in the information environment measures of analyst following, debt levels, stock market return and stock turnover. Considering we document substantial differences in underlying firm characteristics, corporate governance differences are likely appropriate to the mining industry and should not be uniformly labelled as ‘bad’. Our results suggest that media rankings based on corporate governance scores may not accurately portray the resource sector. Overall, our results are of interest to Australian investors and regulators and contribute to a broader understanding of contextually contingent corporate governance.

The Evolution of Motivation and Incentive Systems Research: A Literature Review

Theories on incentive systems and motivation have changed dramatically since the turn of the twentieth century. They started out by viewing the worker as inherently lazy and opposing work which gave birth to piece-rate and cash-bonus systems. Around mid-century, scholars adopt a different view, in which the worker is seen as having different and more complex needs than just money. They find that workers want interesting projects, recognition by co-workers and superiors, and to grow, both in the job and as a person. Cash bonus systems are found to be harmful if improperly organized. Intrinsic motivators are shown to be superior to extrinsic ones and more valued and managers are encouraged to adopt incentive systems that take such motivators into account. Incentive systems can have a big impact on the successful adoption of strategy and a link has been found between the two. The future of this type of research lies within exploring non-monetary rewards in various contexts, designing alternative incentive systems and researching their applicability in business as well as linking application of incentive systems to the evolving research agenda in business research.

Effects of an Advisory Warning and a Cash Bonus on Speeding Behavior

Speeding results in significant human and financial costs annually. This field experiment tested the effectiveness of a monetary incentive and an in-vehicle alert system for curtailing speeding. Fifty participants completed a 3 (incentive group) X 4 (week) mixed factorial design. Twenty were in the incentive group, 20 were in the no-incentive group, and 10 were in a control group. Each driver operated an instrumented vehicle for four weeks. The incentive was offered during Weeks 2 and 3; the alert system was active during either Week 2 or 3. Primary measures included time spent driving at or below, 4 mph, 8 mph, or 9 mph over speed limits. Results indicated a robust effect for the incentive and a limited effect for the advisory system. Interventions tested have clear implications for reducing the risk and severity of traffic crashes using a combination of automation and principles of behavior theory.

Antecedents and Consequences of Subjective Performance Evaluation: Empirical Field Evidence

This paper empirically examines sequential effects of objective measures such as attendance frequency and seniority on subjective performance evaluations, and the impact of compressed performance ratings on the subordinate’s effort, cash bonuses, and stock bonuses in the future, as well as to what extent compression ratings persist. The results of this study providing field empirical evidence in Taiwan during the period 2004-2007 show that both seniority and attendance frequency of the worker positively influence superior’s subjective evaluation of worker performance. Besides, compressed performance ratings lead to lower performance improvements of workers. More importantly, a compression of performance ratings leads to higher cash bonuses, but has no impact on stock bonuses. Finally, a worker will be more likely to get an above-average rating in the subsequent period if he got an above-average rating in the previous period than if he did not.

Consumers’ Attitudes Toward Medical Tourism

This paper identified demographic groups who are likely to participate in medical tourism and further identified three components (economic, treatment-related, travel-related) that explain their motivation to travel for treatment. We hypothesized that differences in consumer characteristics and their motivating factors would influence the consumer's attitudes toward medical tourism. We found that insurance, income, and age influence consumers' economic motivation to use medical tourism, as reflected in their attitudes toward economic incentives such as copayments and cash bonuses. Location and education influenced the travel-related motivation, as reflected in consumers' attitudes toward political stability, legal systems, infrastructure, and vacationing. The treatment-related motivation, as measured by attitudes toward quality of care, post-operative care, confidentiality, and hospital reputation, depended on a consumer's health status. This study can help medical tourism agents to refine their marketing strategies and the employers and insurance companies to better design appropriate economic incentives to encourage participation in medical tourism

Bankers' compensation and fair value accounting

This paper examines the role of certain fair value accounting (FVA) outcomes in compensation of US bank CEOs. The use of FVA in compensation invites an agency cost—the clawback problem—if cash compensation is based on unrealized profits that may reverse in the future. At the same time FVA may be a good measure of current managerial effort and so be cash compensated. We find evidence consistent with a positive link between CEO cash bonus and fair value (FV) valuation of trading assets, managed for short-term profit, as well as (amongst banks with limited trading exposure) a positive link between CEO pay and FV valuations of available for sale (AFS) assets. We find no evidence that trading income is incrementally compensation relevant, indicating that compensation committees avoided the clawback problem for unrealized trading gains. The paper also provides evidence on the link between FVA outcomes and equity-based pay.

Pay-for-performance in a community substance abuse clinic

Pay-for-performance (P4P) strategies improve employee productivity and morale in business settings and are increasingly being implemented in medical care settings. This study investigated whether P4P could improve treatment utilization and retention at a community drug treatment clinic. Counselors had the opportunity to earn cash bonuses based on therapy attendance rates of individual clients and on the quarterly retention rates of their caseload. Using a pre–post study design, average therapy sessions attended during the first month of treatment increased from 4.6 sessions prior to the intervention to 5.5 sessions per client during the intervention. The 90-day client retention rate increased from 40% to 53%. Additional analyses suggest that the improvement in the 90-day retention was mediated by the increase in attendance during the first month of treatment. This project demonstrates that implementing a P4P incentive program in community drug abuse treatment clinics is feasible and effective at improving utilization and retention.

What Drives CEOs to Take on More Risk? Some Evidence from the Laboratory of REITs

Many have pointed to excessive risk‐taking by the CEOs of financial firms as a contributor to the recent worldwide economic crisis. The same observers often blame questionable corporate governance structures and compensation practices for that risk‐taking. But is this perception correct? And what is the relationship between CEO incentives and risk‐taking outside of the financial industry, where the government guarantees provided by deposit insurance could have distorted incentives?In an attempt to answer these questions, the authors analyze the relationship between CEO incentives and corporate risk‐taking by 101 U.S. REITs during the period 2003 to 2007. Their main finding is that corporate risk‐taking, as measured by the growth rate in corporate debt (the only measure of risk that is completely under the control of the CEO), is inversely related to CEO stock ownership—that is, the larger the CEO's equity ownership stake, the slower the growth in debt financing and financial risk‐taking. At the same time, the authors find that financial risk‐taking is positively related to large cash bonuses for the CEOs and to situations in which the CEO is also chairman of the board of directors. Finally, the authors also report that CEOs who are relatively new to the job grow more slowly and borrow less, suggesting that boards of directors can temporarily contain risky expansion plans by the CEO. These results provide support for those corporate governance reformers who wish to cut cash bonus payments for CEOs in favor of long‐term stock ownership.

CEO Compensation And Firm Performance: Is There Any Relationship?

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">Recent media and public attention has focused on CEO compensation.<span style="mso-spacerun: yes;">  </span>This study looks at the relationship between CEO compensation and several measures of firm performance across a wide variety of industries.<span style="mso-spacerun: yes;">  </span>The study used a database of CEO compensation for 200 large public companies which filed proxy statements with the SEC for 2007.<span style="mso-spacerun: yes;">  </span>Total CEO compensation consists of:<span style="mso-spacerun: yes;">  </span>base salary, cash bonuses, perks, stock awards, and option awards.<span style="mso-spacerun: yes;">  </span>The measures of firm performance were:<span style="mso-spacerun: yes;">  </span>company revenue, year-to-year change in net income, and year-to-year change in total shareholder return (TSR).<span style="mso-spacerun: yes;">  </span>Correlation and regression analysis were used to test various hypotheses.<span style="mso-spacerun: yes;">  </span>We expected that total CEO compensation and its components would be directly related to financial measures of company performance.</span></span></p>

Bankers’ Compensation and Fair Value Accounting

This paper examines the role of certain fair value accounting (FVA) outcomes in compensation of US bank CEOs. The use of FVA in compensation invites an agency cost – the clawback problem - if cash compensation is based on unrealized profits that may reverse in the future. At the same time FVA may be a good measure of current managerial effort and so be cash compensated. We find evidence consistent with a positive link between CEO cash bonus and fair value (FV) valuation of trading assets, managed for short-term profit, as well as (amongst banks with limited trading exposure) a positive link between CEO pay and FV valuations of available for sale (AFS) assets. We find no evidence that trading income is incrementally compensation relevant, indicating that compensation committees avoided the clawback problem for unrealized trading gains. The paper also provides evidence on the link between FVA outcomes and equity-based pay.

The association between non-financial performance measures in executive compensation contracts and earnings management

Executive compensation, especially cash bonus compensation, has come under fire by the Securities and Exchange Commission (SEC), the US Federal government, and the media for its role in the current economic crisis. Specifically, the SEC has argued that some compensation packages provide incentives for risk-taking that may undermine shareholder value over the long-term. Short-term incentive payments to executives in the form of cash bonuses are mostly contingent on reaching targets of accounting-related measures or financial performance measures (FPMs). However, the incentives from these payments may lead to accrual manipulation and earnings management (EM). Alternative measures are non-financial performance measures (NFPMs). We expect that firms that employ NFPMs in bonus contracts will have a lower prevalence of EM, since these measures tend to focus executives on the long-term. In this paper, we examine the type of performance measures used by firms in the S&P 500 index in their cash bonus compensation. We find that firms that use both FPMs and NFPMs have lower discretionary accruals compared to firms that use only FPMs, consistent with lower income-increasing EM. However, we do not find evidence of a reduction in EM behavior using the incidence of meeting or just beating analyst earnings benchmarks, another common EM proxy. In additional tests on a subset of firms with equity offerings, in which incentives for income-increasing manipulation are likely high, we find that firms with NFPMs have lower discretionary accruals. The implication is that NFPMs can be used in compensation contracts to reduce EM behavior and mitigate erroneous executive compensation. This is important to investors as well as regulators, especially in light of the recent debate on compensation reform.

The Effects of Differential Interviewer Incentives on a Field Data Collection Effort

Surveys routinely offer incentives to motivate respondents and increase the likelihood of their participation, yet surprisingly little is known about the effectiveness of interviewer incentives. If interviewer incentives increase interviewers’ success in gaining cooperation, they could help address declining survey response rates. In this article, we present the results of an experiment testing the effectiveness of interviewer incentives in the form of cash bonuses for each successfully completed field interview. We did not find evidence that higher payments to interviewers for each completion led to increased effort on the part of interviewers nor did they lead to higher levels of success in securing respondent cooperation. These findings suggest that per complete interviewer incentives may not be cost effective in reducing survey nonresponse.

Bank CEO incentives and the credit crisis

We investigate whether bank performance during the recent credit crisis is related to chief executive officer (CEO) incentives before the crisis. We find some evidence that banks with CEOs whose incentives were better aligned with the interests of shareholders performed worse and no evidence that they performed better. Banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.

Bank CEO Incentives and the Credit Crisis

We investigate whether bank performance during the recent credit crisis is related to chief executive officer (CEO) incentives before the crisis. We find some evidence that banks with CEOs whose incentives were better aligned with the interests of shareholders performed worse and no evidence that they performed better. Banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.

The impact of firm strategy and foreign ownership on executive bonus compensation in Japanese firms

Building on information-processing perspectives and the Japanese contextual factors, this study investigates the relationships between firm strategy and executive bonus pay as well as the moderating role of foreign ownership on the strategy–compensation relationship in Japanese firms. We focus on R&D investment and product diversification as strategy variables and investigate their direct effects on executive bonus pay. Further, we examine the moderating effects of foreign ownership on the strategy–pay sensitivity. The results, based on a sample of the 148 largest industrial firms in Japan for the 1990–1997 period, show that both R&D investment and product diversification are positively related to executive bonus pay. Our findings also indicate that foreign ownership negatively moderates the relationships between the strategy variables and executive compensation, suggesting that foreign investors play an active monitoring role, reducing cash bonus payments when their invested firms choose to increase R&D or pursue diversification strategy.