Can Tougher Future Targets Make CEOs Ease Up Today?

Summary

Accounting and Reporting Firm Practice Management Management Accounting

This study examines whether CEOs strategically reduce effort when strong performance could lead to more challenging future performance targets, a phenomenon known as the ratchet effect. Using data from 270 S&P 1,500 companies between 2012 and 2020 (1,491 firm-year observations and 5,928 firm-quarter observations), the researcher investigates how two sources of implicit incentives—CEO origin (externally hired versus internally promoted) and career horizon (distance from retirement)—influence CEOs’ willingness to reduce effort near year-end. The analysis focuses on earnings per share (EPS) targets commonly used in executive compensation plans.