CEO Compensation Structures and Earnings Management: Empirical Evidence from GCC Economies

This research presents a new look at the relationship between CEO compensation structures and earnings management practices within publicly listed companies in Gulf Cooperation Council (GCC) economies between 2015 and 2024. With a quantitative approach, this study differentiates between fixed and performance-based components of compensation and utilizes the Modified Jones Model to estimate discretionary accruals as a proxy for earnings management. Using a multivariate regression analysis, the study found a significant positive relationship between the equity-linked (i.e., performance-based) component of CEO pay, and earnings manipulation, while fixed salaries were positively associated or had no relation at all. These findings suggest that performance-based compensation motivates opportunistic financial reporting to meet performance standards. The study answers major implications for policy makers and boards of directors in the GCC, which may require reforms in the design of executive pay structures with a long-term emphasis on value added for shareholders, accountability, and governance. This research is important as it adds new evidence to the literature from the less studied GCC area of the world and pushes forward global conversations about executive accountability and the quality of financial reporting in emerging market contexts. In addition, it discusses an aspect that has not been much addressed in the literature: the focus on the voluntary or “optional” aspects of board committees in companies.