The real effects of financial reporting on pay and incentives
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 ear...
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| Other Authors: | |
| Format: | Article |
| Language: | English |
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Informa UK Limited
2021
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| Online Access: | https://hdl.handle.net/1721.1/129708 |
| _version_ | 1811096951669653504 |
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| author | Core, John E. |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Core, John E. |
| author_sort | Core, John E. |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T16:51:58Z |
| format | Article |
| id | mit-1721.1/129708 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T16:51:58Z |
| publishDate | 2021 |
| publisher | Informa UK Limited |
| record_format | dspace |
| spelling | mit-1721.1/1297082022-10-03T08:49:09Z The real effects of financial reporting on pay and incentives Core, John E. Sloan School of Management 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. 2021-02-08T19:20:53Z 2021-02-08T19:20:53Z 2020-06 2021-02-08T18:50:01Z Article http://purl.org/eprint/type/JournalArticle 2159-4260 https://hdl.handle.net/1721.1/129708 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) en 10.1080/00014788.2020.1770931 Accounting and Business Research Creative Commons Attribution-NonCommercial-NoDerivs License http://creativecommons.org/licenses/by-nc-nd/4.0/ application/pdf Informa UK Limited Taylor & Francis |
| spellingShingle | Core, John E. The real effects of financial reporting on pay and incentives |
| title | The real effects of financial reporting on pay and incentives |
| title_full | The real effects of financial reporting on pay and incentives |
| title_fullStr | The real effects of financial reporting on pay and incentives |
| title_full_unstemmed | The real effects of financial reporting on pay and incentives |
| title_short | The real effects of financial reporting on pay and incentives |
| title_sort | real effects of financial reporting on pay and incentives |
| url | https://hdl.handle.net/1721.1/129708 |
| work_keys_str_mv | AT corejohne therealeffectsoffinancialreportingonpayandincentives AT corejohne realeffectsoffinancialreportingonpayandincentives |