Earnings Misses Have Material Impact on CEO, CFO Pay
It’s no wonder top corporate executives are obsessed with meeting Wall Street’s quarterly earnings benchmarks.
A new working paper* published by Harvard Business School shows that missing analysts’ or companies’ own earnings forecasts exacts a steep penalty for the chief executive and chief financial officers in both compensation and job longevity.
The paper finds that career penalties in the form of reduced bonuses, smaller stock grants and a greater chance of forced dismissal are more pronounced at companies that provide quarterly earnings guidance.
Failing to meet two analyst consensus forecasts in a year is associated with a bonus cut for the CFO of 8 percent of salary, an equity cut of 24 percent relative to a world with no misses and a 0.62 percentage point higher probability of being forced out of his job. The analogous numbers for the CEO are a bonus cut equal to 14 percent of salary, 24 percent equity cut relative to a world with no misses, and a 0.61 percentage point higher chance of being dismissed.
The study examined earnings misses and compensation from 1993 to 2004 and controlled for the magnitude of the earnings surprise, operating returns and stock returns. The study concludes that:
- Corporate boards react directly to managers’ ability to meet earnings targets or financial metrics incorporated in such targets.
- Senior managers’ preoccupation with meeting earnings benchmarks may be based in part on career concerns.
- The correlation between compensation and meeting earnings estimates has risen since 2002 and the passage of Sarbanes-Oxley.
*CEO and CFO Career Consequences to Missing Quarterly Earnings Benchmarks
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