Selection of Short-Term Accounting-Based Bonus Plans.

Abstract ABSTRACT: This paper tests two alternative hypotheses about why different firms choose different accounting measures of performance when determining executive compensation. The two measures of performance examined are accounting profits after income taxes and accounting profits before income taxes. Empirical evidence weakly suggests that the greater the degree to a firm is multinational, the more likely it is to use bonus plans that reward the manager on the basis of after-tax profits, as opposed to before-tax profits. The empirical evidence also suggests that the more capital intensive a firm is, the more likely it is to use bonus plans that reward the manager on the basis of after-tax profits.