Beating the Target: A Closer Look at Annual Incentive Plans

Kim, Daniel Sungyeon; Yang, Jun

doi:10.2139/ssrn.1361814

Cited by 16 publications

(15 citation statements)

References 29 publications

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“…However, the results in columns (3)-(4) show that this result is not robust and arises mainly because column (1) does not control for year fixed effects and fluctuations in the macroeconomic environment. We interpret this as a further evidence that empirical tests of the asymmetric target ratcheting hypothesis are inconclusive in that different model specifications and data used yield different results (Anderson et al 2010;Kim and Yang 2012).…”

Section: Target Revisions and Past Performancementioning

confidence: 80%

Section: Prior Literaturementioning

confidence: 99%

“…It is well documented now that targets ratchet in the sense that exceeding a target is followed by a target increase in the next period. Some studies further suggest that target ratcheting is asymmetric in that failure to meet a target is associated with a weaker effect on target revisions (Leone and Rock 2002;Bouwens and Kroos 2016), although other studies find no asymmetric effect or an asymmetric effect with the opposite sign (Anderson et al 2010;Kim and Yang 2012;Indjejikian, Mat ejka, Merchant et al 2014). Indjejikian, Mat ejka, and Schloetzer (2014) point out that target ratcheting as reflected in the sensitivity of target revisions to past own performance does not automatically imply the ratchet effect on incentives, that is, managerial incentives to withhold end-of-period effort to prevent future target increases.…”

Section: Prior Literaturementioning

confidence: 99%

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Relative Performance Evaluation and the Ratchet Effect

Casas‐Arce

Holzhacker

Mahlendorf

et al. 2018

Contemporary Accting Res

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When targets depend on past performance, incentives are adversely affected by the ratchet effect. We provide theory and evidence that incorporating past peer performance into targets can alleviate this adverse incentive effect. In particular, we present an analytical model that characterizes optimal target revisions as a function of past own and past peer performance. We then test the predictions of our model using data on 2008–2010 performance targets from 354 units of a governmental agency responsible for reintegration of the long‐term unemployed into the labor market. As a unique feature of our data, we have information on peer group quality, defined as the extent to which peer performance is informative about common shocks. Consistent with our model, we find that higher peer group quality (a) increases sensitivity of target revisions to past peer performance, (b) reduces sensitivity of target revisions to past own performance, and (c) reduces the ratchet effect as reflected in managerial incentives to withhold end‐of‐year effort.

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Section: Target Revisions and Past Performancementioning

confidence: 80%

Section: Prior Literaturementioning

confidence: 99%

Section: Prior Literaturementioning

confidence: 99%

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Relative Performance Evaluation and the Ratchet Effect

Casas‐Arce

Holzhacker

Mahlendorf

et al. 2018

Contemporary Accting Res

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“…Furthermore, only a few companies have used the new SEC disclosure requirements as a source of data (e.g. D. S. Kim and Yang (2010); S. Kim and Shin (2014). Therefore, this paper also contributes to existing literature by making use of the 2006 SEC additional disclosure requirements.…”

Section: What Is the Relationship Between Executive Compensation Contmentioning

confidence: 95%

“…Second, an unpublished working paper by D. S. Kim and Yang (2010) focuses on the relation between the level of annual incentive targets and the actual results. Their research also builds on the new SEC regulations by obtaining data from the disclosure of compensation targets by companies.…”

Section: Executive Compensation and The New Sec Regulationmentioning

confidence: 99%

The impact of voluntary management earnings forecasts on executive compensation contracts

Venmans¹

2016

MARBLE

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This study attempts to find a relationship between management earnings forecasts and executive compensation contracts. It focuses on three different elements of management earnings forecasts, namely: the type of forecast, the actual expectation of the forecast and the forecasting frequency. The three relations are analysed through both logistic and linear regressions using a sample of 90 U.S. listed companies between 2006 and 2012. From the analysis, three conclusions can be drawn. First, companies do not always align the measures of their forecasts with the compensation measures used in executive compensation contracts. Second, the target levels used in management earnings forecasts and compensation contracts sometimes differ significantly, depending on the type of measure. Finally, the forecasting frequency of a company does not influence the type of compensation measures used. In general, it appears that earnings forecasts hold some relation to executive compensation contracts. Future research can further investigate this relationship, for example by focusing on the causes of the results or through replicating the analysis.

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Executive Compensation

McCall

2010

Finance Ethics

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Beating the Target: A Closer Look at Annual Incentive Plans

Cited by 16 publications

References 29 publications

Relative Performance Evaluation and the Ratchet Effect

Relative Performance Evaluation and the Ratchet Effect

The impact of voluntary management earnings forecasts on executive compensation contracts

Executive Compensation

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