Striking Oil in the Boardroom : Overpaying Executives through Manipulating Performance Metrics

Using hand-collected proxy statement data, we examine the distribution of performance metrics used to calculate executive compensation in 86 US oil and gas firms. We find that the distribution of achieved–target differences is significantly discontinuous at zero over the 13-year period 2006-2018. Executives are three times more likely to just beat than to just miss their performance targets. When we split metrics into GAAP-like and non-GAAP-like measures, we find discontinuities only in the non-GAAP-like group. The discontinuities also disappear when firms are financially distressed or have better governance. Our findings suggest that managers can routinely manipulate performance metrics in order to increase their performance-based compensation. Our framework can help analysts and investors in their firm governance assessments and the US Securities and Exchange Commission in its current efforts to redesign disclosure rules for non-GAAP performance metrics. The discontinuity detection approach we introduce can help SEC pre-filter filings and focus its review process