Some thoughts on performance-based pay, earnings management and corporate law from an antipodean perspective

Abstract

Performance-based remuneration theoretically is an effective way of aligning the interests of company management with those of shareholders. However, 'earnings management' is a phenomenon that has been well documented by accounting researchers. Empirical studies suggest that corporate officers who are subject to performance-based remuneration may manage company accounting figures to improve their remuneration. This paper contends that such practices are inconsistent with the duties of loyalty to which these officers are subject, and concludes by identifying a corporate governance role for legal advisers in light of such conduct.