Orla Lenihan

Orla Lenihan

PhD Thesis Title: A Study of CEO Bonus Plans: Performance Measures, Target Difficulty, and Non-GAAP Reporting Practices

Supervisor: Professor Niamh Brennan

External Examiner:
Professor Martin J. Conyon, Bentley University


This research examines performance-measurement aspects of US firms’ CEO annual cash bonus plans through a collection of three papers prepared for publication in peer-reviewed international journals. The primary research methods are cross-sectional Tobit and OLS regressions, an in-depth descriptive analysis, and a form-oriented content analysis. Paper 1 examines the linkages between firm strategies and CEO-bonus performance measures, finding that boards choose from multiple performance measures to incentivize the pursuit of firm-specific strategies that vary across firms. This implies that, by linking firm strategies to performance measures, CEO bonus plans can be designed to incentivize CEO efforts at long-term shareholder-value creation. Paper 2 studies the extent of challenge or difficulty within CEO-bonus performance targets. The findings suggest that boards take a holistic approach to CEO-performance-target setting by considering several factors including the importance of the performance measure, past performance, and future growth expectations. This leads to CEO performance targets that are challenging, yet realistically achievable, thus maximizing CEO motivation. Paper 3 provides descriptive evidence on both the use of non-GAAP financial metrics in CEO bonus plans and firms’ narrative reporting of these metrics in compensation disclosures. The evidence demonstrates that non-GAAP metrics are pervasive in CEO-performance evaluation, with CEO bonus payments predominantly determined by non-GAAP performance. However, firms’ non-GAAP reporting practices in compensation disclosures are weak, suggesting that the lack of transparency and clarity in these disclosures may potentially mislead investors in their pay-for-performance assessments of CEO compensation.  

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