CFO Fiduciary Responsibilities and Annual Bonus Incentives

Authors: INDJEJIKIAN, RAFFI; MATĚJKA, MICHAL

Source: Journal of Accounting Research, Volume 47, Number 4, September 2009 , pp. 1061-1093(33)

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Abstract:

We examine how firms design bonus plans of their CFOs. CFOs participate in decision making much like other executives, but they also have significant fiduciary responsibilities for reporting firms' financial results. Responsibility for financial reporting raises the question of whether it is appropriate to pay CFOs annual bonuses contingent on self-reported financial performance. In this paper, we provide a framework that characterizes CFO bonuses as a tradeoff between CFOs' decision-making responsibilities and their fiduciary duties over financial reporting. This framework yields a number of implications that we examine empirically using a proprietary survey of CFO compensation practices of public and private firms. Our main finding shows that from 2003 to 2007 public entities (relative to private entities) reduced the percentage of CFO bonuses contingent on financial performance. We interpret this result as evidence that firms mitigate misreporting practices in part by deemphasizing CFO incentive compensation.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1475-679X.2009.00343.x

Affiliations: 1: Ross School of Business, University of Michigan.

Publication date: 2009-09-01