In the wake of the recent financial crisis, proposals have been put forward to resolve "problems" with executive pay and incentives. Although these proposals discuss ways firms or regulators might get executives to hold greater incentives, they fail to identify how one should determine whether...

This paper discusses two real effects of financial reporting on pay and incentives: (1) Better earnings leads to better incentives, and (2) If pay is mis-measured, pay can be mis-used. The first real effect follows from the fact that incentives are often based on earnings, and the effectiveness...