Accounting-Based Incentive

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Behavioral Accounting

    An accounting method which takes into account key decision makers ...
RELATED FAQS
  1. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
  2. How do I calculate my effective tax rate using Excel?

    Your effective tax rate can be calculated using Microsoft Excel through a few standard functions and an accurate breakdown ... Read Full Answer >>
  3. How important are contingent liabilities in an audit?

    Contingent liabilities, when present, are very important audit items because they normally represent risks that are easily ... Read Full Answer >>
  4. How does quantifying fixed overhead volume variance show whether a company is profitable ...

    Fixed overhead volume cannot definitively prove a company is profitable, but it can be used to provide an excellent indication ... Read Full Answer >>
  5. What does inventory turnover tell an investor about a company?

    The inventory turnover ratio determines the number of times a company's inventory is sold and replaced over a certain period. ... Read Full Answer >>
  6. What is a deferred tax liability?

    A deferred tax liability is an account that is listed on a company's balance sheet and occurs when its taxable income is ... Read Full Answer >>
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 Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  9. Economics

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.
  10. Investing Basics

    How Much Do CPAs Make?

    If you're considering becoming a CPA, here's what you might expect to earn.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center