An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Austin L Reitenga
University of Alabama

Abstract: The sensitivity of bonus compensation to firm performance is compared between CEOs and non-CEOs. Executives are classified into: CEOs, high ranking executives, and low ranking executives. When performance coefficients are not allowed to vary with the sign and extremity of performance, performance coefficients are largest for CEOs and smallest for lower level executives. However, when performance coefficients are allowed to vary with the sign and extremity of performance three interesting results emerge. First, all differences between CEOs and non-CEOs are limited to differences in the intercepts related to the sign and extremity of performance rather than slope coefficients. Second, all differences between CEOs and non-CEOs occur when performance is very poor or very good with CEO bonus compensation being smaller (larger) when performance is very poor (very good). Finally, the sign of earnings is more important than the magnitude of earnings in explaining bonus compensation.

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