Cash Compensation and Earnings' Components Around CEO Turnover : Does the Compensation Committee See Over the Horizon?

Managers in their terminal years have an incentive to manipulate earnings to enhance earnings based bonuses. We examine this horizon problem by considering the role of the compensation committee in setting terminal-year compensation. We predict that compensation committees are aware of the horizon problem and intervene when setting pay in terminal years. We find that the relation between cash compensation changes and discretionary accruals changes is significantly reduced. This finding is similar for both positive and negative discretionary accrual changes. Our findings suggest that compensation committees do not act naively when setting CEO compensation in the terminal year