Accounting-Based Incentive


DEFINITION of 'Accounting-Based Incentive'

A method for compensating corporate executives based on whether they help their companies reach certain performance levels in areas such as earnings per share and return on equity. These plans are widely used and can be divided into two types: those that reward performing executives with cash and those that reward performing executives with stock. It is common for incentive pay to make up a significant portion of an executive's compensation in firms of all sizes. Executives are also compensated with a base salary and benefits.

BREAKING DOWN 'Accounting-Based Incentive'

The Journal of Managerial Issues published a study of 175 firms that adopted accounting-based incentive plans between 1971 and 1980, which showed that these firms usually rose from performing below or at industry medians to exceeding industry medians after adopting the plans. After controlling for other variables, the improvement in performance was believed to be tied to plan adoption. Other performance measures that companies commonly use to measure executive performance include cash flow, return on assets, operating income, net income and total shareholder return.

  1. Voodoo Accounting

    Creative rather than conservative accounting practices. Voodoo ...
  2. Dealer Incentive

    A corporate sales strategy in which the price a dealer has to ...
  3. Forensic Accounting

    Forensic Accounting utilizes accounting, auditing, and investigative ...
  4. Accounting

    The systematic and comprehensive recording of financial transactions ...
  5. Financial Accounting Standards ...

    A seven-member independent board consisting of accounting professionals ...
  6. Stock Compensation

    A way corporations use stock options to reward employees. Stock ...
Related Articles
  1. Personal Finance

    CEO Savvy And Stock's Success Go Hand In Hand

    A CEO shapes the direction a business will take. We provide four clues to help you determine which ones have the right stuff.
  2. Professionals

    The Path To Becoming A CEO

    Think you have what it takes to be chief executive? Find out what those at the top have in common.
  3. Entrepreneurship

    Female CEOs Who Climbed The Corporate Ladder

    These women climbed the ladder and broke the glass ceiling.
  4. Options & Futures

    A Guide To CEO Compensation

    Make sure you assess whether a CEO has a stake in doing a good job for you, the shareholder.
  5. Options & Futures

    Evaluating Executive Compensation

    Find out how to determine whether a CEO is being overpaid.
  6. Options & Futures

    Reining In CEO Rewards

    Could bloated CEO compensation be to blame for the widening gap between the rich and the ultra-rich?
  7. Options & Futures

    Executive Compensation: How Much Is Too Much?

    The proxy statement can help determine whether a CEO is well compensated - or just overpaid.
  8. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  9. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  10. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  1. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  3. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  4. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  5. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  6. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center