Accounting-Based Incentive

An accounting-based incentive is designed to compensate corporate executives based on performance measures such as earnings per share and return on equity. Other performance measures that companies commonly use to gauge executive performance include cash flow, return on assets, operating income, net income and total shareholder return. These incentive plans are widely used and based on the notion that the goal and purpose of company management is to increase shareholder value.

Accounting based incentives typically reward performing executives with cash and company stock or employee stock options. 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 other benefits. Companies that offer incentive plans across the workforce create formulas based on individual salary level and both business unit and broader firm performance to determine annual incentive awards for rank-and-file employees.

Accounting-based incentives have been a topic of study for several decades as businesses have evolved definitions of what constitutes commercial success and how it can best be achieved. Aligning employee and executive goals with those of shareholders based on accounting measures is viewed as providing a straight-forward process for determining incentive compensation. Critics have argued that as executives have increasingly been compensated with company stock incentives, they have been encouraged to focus on short-term impacts to share price rather than long-term planning for business stability. CEO compensation, as reported by the Economic Policy Institute, grew at 90 times the rate of typical worker pay from 1978 to 2014.