The Role of Executive Cash Bonuses in Providing Individual and Team Incentives

The Role of Executive Cash Bonuses in Providing Individual and Team Incentives

By
Wayne Guay, John D. Kepler, David Tsui
Journal of Financial Economics. August
2019, Vol. 133, Issue 2, Pages 441-471

Given CEOs’ substantial equity portfolios, much recent literature on CEO incentives regards cash-based bonus plans as largely irrelevant, begging the question of why nearly all CEO compensation plans include such bonuses. We develop a new measure of bonus plan incentives and show that performance sensitivities are much greater than prior estimates. We also test hypotheses regarding the role of bonuses in providing executives with individualized and team incentives. We find little evidence supporting the individualized incentives hypotheses but find consistent evidence that bonus plans appear to be used to encourage mutual monitoring and to facilitate coordination across the top management team as a whole.