Academic journal article Journal of Accountancy

Use Best Practices in Executive Compensation Plans

Academic journal article Journal of Accountancy

Use Best Practices in Executive Compensation Plans

Article excerpt

Companies encounter problems when their compensation programs motivate executives to act in ways that conflict with accurate financial reporting or to rely too heavily on stock price appreciation. Working with compensation committees, CPA consultants can design executive incentive packages that encourage management to improve corporate performance without losing sight of long-term objectives.

Here are some best practices CPAs can offer for compensation committee approval to address the role company performance and stock incentives should play in executive compensation programs.

[] Use accounting measures--such as earnings per share, return on investment or cash flow--in annual and long-term performance plans to make sure executives stay committed to operational excellence rather than to short-term stock price growth. To eliminate potential conflicts between management self-interest and accurately reporting financial results, committees should make sure accounting metrics reflect critical and achievable measures of operating performance. Compensation plans typically include two or three performance measures of results for which the participant is held accountable. (Once the executive has a target, he or she develops operational plans to achieve the accounting numbers.)

[] Have the external auditors confirm calculations to the compensation committee if executive payouts are to be based on pre-set formulas to ensure they are correct and to add credibility to the process.

[] Encourage accurate financial reporting; consider whether the company should reduce current incentive payments to executives who previously had benefited from inflated earnings in situations where it had to restate them.

[] Reduce payments in plan payout schedules when executives do not meet specified goals based on financial and nonfinancial performance measures. …

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