Earnings per Share Goals and CEO Incentives

Abstract

We examine differences in CEO achievement of EPS goals set separately through analyst forecasts and firm bonus plans. Having different goals for the same performance metric enables us to assess their relative importance in incentivizing CEOs. We find CEOs frequently achieve analyst forecasts, but rarely achieve bonus goals exceeding the forecast. Despite lower compensation risk accompanying easier goals, we also find that bonus goals set below forecasts are associated with greater pay, suggesting the use of easier goals to compensate CEOs while maintaining the appearance of pay-for-performance. The results highlight the importance of considering both sets of performance goals simultaneously when evaluating their incentive effects.