Determinants of the relation between transitory earnings and CEO cash compensation in the USA

Prior research documents that gains from non-recurring transactions flow through to CEOs' compensation, but that losses from non-recurring transactions do not. This paper extends extant literature by exploring the determinants of this phenomenon. We provide evidence that the prior findings of the asymmetric weighting of transitory gains over losses are more prominent for firms where CEOs are also Chairmen of the Board (duality effect). This asymmetry, however, weakens in firms with a high level of external monitoring, such as those in regulated industries (monitoring effect). The compensation weight on transitory gains also increases as earnings predictability declines (uncertainty effect), as CEOs get closer to retirement (retirement effect), and as the absolute magnitude of the non-recurring earnings increases relative to total earnings (magnitude effect). This study has practical implications for regulators, corporations and investors, both in the USA and abroad.