The Impact of Accounting Based Earnings Attribute on Managerial Pay-Performance Sensitivity : Examining the Role of Earnings Persistence

This study explores whether or not earnings persistence is considered while determining managerial compensation in Japanese listed companies. The results show that managerial compensation is significantly contingent on accounting earnings when earnings persistence is high. But, there is no significant pay-performance relationship when earnings persistence is low. Moreover, the pay-performance sensitivity is significantly larger in magnitude when earnings persistence is high. This study further considers R&D spending as a proxy of managerial commitment to future corporate performance, and examines it as an additional determinant of managerial compensation. The results show that, when earnings persistence is low, significantly larger weight is placed on this additional performance measure for determining managerial compensation than when persistence is high. Overall, this study provides interesting evidences about the role of earnings persistence while determining managerial compensation in Japanese context