CFO Fiduciary Responsibilities and Annual Bonus Incentives

Raffi Indjejikian, Michal Matejka

Research output: Contribution to journalArticle

48 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)1061-1093
Number of pages33
JournalJournal of Accounting Research
Volume47
Issue number4
DOIs
StatePublished - Sep 2009
Externally publishedYes

Fingerprint

Bonus
Incentives
Bonuses
Responsibility
Financial performance
Financial reporting
Decision making
Bonus plans
Public firm
Private firms
Incentive compensation
Fiduciary duty
Trade-offs
Financial result
Misreporting

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

CFO Fiduciary Responsibilities and Annual Bonus Incentives. / Indjejikian, Raffi; Matejka, Michal.

In: Journal of Accounting Research, Vol. 47, No. 4, 09.2009, p. 1061-1093.

Research output: Contribution to journalArticle

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