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. Financial Accounting Standards ...

    A seven-member independent board consisting of accounting professionals ...
  4. Forensic Accounting

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

    The systematic and comprehensive recording of financial transactions ...
  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's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.
  9. Professionals

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
  10. Investing

    What are Direct Costs?

    Direct costs for finished goods refer to the items and services directly used in production. Other costs such as rent and insurance for the production site are indirect costs. These costs may ...

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center