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.

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  1. Do dividends affect working capital?

    Regardless of whether cash dividends are paid or accrued, a company's working capital is reduced. When cash dividends are ... Read Full Answer >>
  2. Do prepayments provide working capital?

    Prepayments, or prepaid expenses, are typically included in the current assets on a company's balance sheet, as they represent ... Read Full Answer >>
  3. Does working capital include salaries?

    A company accrues unpaid salaries on its balance sheet as part of accounts payable, which is a current liability account, ... Read Full Answer >>
  4. What is a profit and loss (P&L) statement and why do companies publish them?

    A profit and loss (P&L) statement, or balance sheet, is essentially a snapshot of a company's financial activity for ... Read Full Answer >>
  5. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  6. Do dividends go on the balance sheet?

    The only account recorded on the balance sheet, when dividends are declared and before they are paid out to a company's shareholders, ... Read Full Answer >>

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