Accounting Information Reliability and Discretionary Bonuses

While objective measures of performance often do not fully reflect executives’ efforts, compensation committees could use discretionary bonuses based on subjective evaluation of executives’ performance to improve the alignment of executives’ efforts with their compensation. As the accuracy and informativeness of objective performance measures decrease, compensation committees will place decreased weight on performance evaluation based on objective measures and increased weight on subjective evaluation of executives’ performance. Use Big 4 auditors and internal control effectiveness to measure the accounting quality and information reliability, I predict and find that low accounting quality and low information reliability reduce a firm’s tendency to pay formula based bonus and increase a firm’s tendency to pay discretionary bonus.

Many thanks to Tao’s dissertation committee: • Committee Chair – Mark Vargus – Assistant Professor – Drexel University • Committee Co-Chair: Anthony Curatola - Professor – Drexel University • Committee Member Hsihui Chang - Professor- Drexel University • Committee Member: Curtis Hall - Assistant Professor – Drexel University • Committee Member: Thomas Chiang - Professor – Drexel University