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.

RELATED TERMS
  1. Golden Life Jacket

    An exceptional compensation package offered by the acquiring ...
  2. Performance Shares

    In the case of stock compensation, shares of company stock given ...
  3. Stock Compensation

    A way corporations use stock options to reward employees. Stock ...
  4. Execution Only

    A trading service that is restricted to execution of trades only, ...
  5. Automatic Execution

    A method of executing trades without inputting them manually. ...
  6. Contingent Order

    1. An order involving the simultaneous execution of two or more ...
Related Articles
  1. 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.
  2. Professionals

    Order Execution

    Most customer orders, which are market orders or executable limit orders, will be routed electronically to the trading post for automatic execution. The electronic system bypasses the firm’s ...
  3. Fundamental Analysis

    Ethical Investing: Corporate Governance

    By Amy Fontinelle Corporate governance looks at how companies manage themselves and their relationships with shareholders and stakeholders. Ethical investors want to make sure that corporations ...
  4. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  5. Professionals

    NASDAQ Execution Systems

    Most NASDAQ trades are executed over the NASDAQ workstation using one of its automated execution systems. These systems allow dealers to execute orders without having to speak with one another ...
  6. Professionals

    Introduction

    A firm handling a customer’s order is entitled to be compensated for executing the customer’s order. How the firm is compensated depends on the way the firm executes the order. Firms ...
  7. Options & Futures

    Backdating: Insight Into A Scandal

    Any time money is involved, a scandal is sure to follow. Find out how a university study blew the cover off this one.
  8. Options & Futures

    Employee Stock Options (ESO)

    Employee stock options are a form of equity compensation granted by companies to their employees and executives.
  9. Professionals

    Customer Confirmations

    All customers must be sent a confirmation at or before the completion of the transaction. Industry rules consider the completion of the transaction to be the settlement date. It is unlawful to ...
  10. Professionals

    Achieving Economic & Technological Efficiency

    Achieving Economic & Technological Efficiency. Learn what economic constraints a firm faces, the various types of firms and factors promoting cost efficiency.
RELATED FAQS
  1. I've noticed executives buy a lot of stock below market value, and then they sell ...

    On October 30, 2006, a Google executive officer purchased 2,541 shares of Google at $9 per share and sold these same shares ... Read Answer >>
  2. How do financial advisors execute trades?

    Understand how financial advisors normally execute an investor's trades. Learn about the different type of markets and exchanges ... Read Answer >>
  3. Why does executive compensation facilitate when a company buys back its stock?

    Learn about how companies use stock buybacks in order to facilitate executive compensation and why the practice is very controversial. Read Answer >>
  4. Mike is a highly compensated employee of XYZ Company, his company has offered him ...

    The correct answer is b): One of the most common types of nonqualified retirement plans is the deferred compensation plan. ... Read Answer >>
  5. What is an evergreen provision and how does it affect shareholders?

    It is common for publicly-traded corporations to provide more than just regular salary compensation to their management and ... Read Answer >>
  6. Why did Larry Page pay himself a salary of only $1 a year at Google?

    Learn possible reasons for Google co-founder Larry Page's continued acceptance of an annual salary of only $1 as chief executive ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  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. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center