Before‐tax versus after‐tax earnings as performance measures in compensation contracts

Abstract

Reviews previous research on factors affecting the choice of using before‐ or after‐tax performance measures to determine executive compensation; and uses regression techniques on a sample of US firms to test the relationship between this choice and various factors suggested by the literature. Shows that after‐tax measures are more likely to be used in service industries and are positively related to firm size, multinational operations, the number of operating segments and capital intensity; but negatively related to leverage. Suggests that firms with more tax planning opportunities use post‐tax performance measures to encourage managers to consider the tax consequences of their actions, but trade off large debt tax shields in favour of other ways to plan tax.

Citation

Attwood, T.J., Omer, T.C. and Shelley, M.K. (1998), "Before‐tax versus after‐tax earnings as performance measures in compensation contracts", Managerial Finance, Vol. 24 No. 11, pp. 29-43. https://doi.org/10.1108/03074359810765697