ACCOUNTING EARNINGS AND TOP EXECUTIVE-COMPENSATION

This paper investigates the role of accounting earnings in top executi ve compensation contracts. It provides evidence in support of the hypo thesis that earnings-based incentives help shield executives from mark et-wide factors in stock prices. The paper demonstrates that earnings reflect firm-specific changes in value, but are less sensitive to mark et-wide movements in equity values. As a result, the inclusion of earn ings-based performance measures in executive compensation contracts he lps shield executives from fluctuations in firm value that are beyond their control. The hypothesis is shown to explain cross-sectional vari ation in the use of earnings-based incentives.