The real effects of financial reporting on pay and incentives
Name
The real effects of financial reporting on pay and incentives.pdf
Description
Published version
Size
634.91 KB
Format
Adobe PDF
Checksum (MD5)
78c50e12a70e334dc8b40ef1b7fa7342
Author(s)
Core, John E.
Date Issued
June 2020
Journal
Accounting and Business Research
Publisher
Informa UK Limited
Citation
Core, John E. “The real effects of financial reporting on pay and incentives.” Accounting and Business Research, 50, 5 (June 2020): 448-469 © 2020 The Author(s)
Version
Final published version
Abstract
This paper discusses two real effects of financial reporting on pay and incentives: (1) Better earnings leads to better incentives, and (2) If pay is mismeasured, pay can be misused. The first real effect follows from the fact that incentives are often based on earnings, and the effectiveness of earnings-based incentives is positively related to the quality of earnings. Greater use of earnings in incentives provides better incentives at a lower cost. The second real effect has to do with how well the accounting system measures the expense of various pay components. Complex calculations are required to value complex pay components such as options, post-employment benefits, and performance-vested equity, and these calculations have historically not been done correctly. The incorrect accounting leads to these pay components being misused. I conclude by discussing how accounting and disclosure of pay and incentives can be improved.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1080/00014788.2020.1770931
