Non-GAAP Disclosures and CEO Pay Levels

Abstract

We examine the association between CEO cash and equity compensation and non-GAAP disclosure practices in a responsive regulatory and opaque compensation reporting environment. Our empirical evidence, based on a sample of public companies in New Zealand, shows that CEO cash compensation is associated with the likelihood and frequency of non-GAAP disclosures, whereas equity incentives are not. Our results document evidence of an increase in the frequency of non-GAAP disclosures and a decrease in the provision and quality of reconciliation between non-GAAP measures and closely related GAAP measures around CEO cash compensation. In particular, managers use these disclosures when their GAAP earnings benchmarks are missed. A marginal decrease in opportunistic non-GAAP disclosures following the adoption of the International Financial Reporting Standards (IFRS) indicates little change in reporting behavior following adoption of IFRS. Our findings suggest that managers disclose non-GAAP measures with opportunistic intentions motivated by compensation and points to the need for regulators to set policy about clear reconciliation standards.