The effect of managers’ cash bonus plans on earnings management

Abstract

The primary objective of this study is to examine the managers’ cash bonuses on earnings management. This study has reveals the effectiveness of the cash bonus compensation role, in form fixed bonus in mitigating EM practices, as well as variable bonus which suggest to encourage manager to employ more earnings management. Since variable bonus has known characteristics that differ from fixed bonus, exploring the fixed cash bonus seems intriguingly. This study perform data from the UK firms, between 2010 and 2020, to analyse if the managers’ cash bonus plans (fixed and variable). After conducting the analyses, this study reveals that the fixed cash bonus plan becomes an effective strategy in restraining EM practices within the UK context as the finding shows negative significant correlation. Consequently, variable bonus plans are revealed to have a significant positive association with EM. Finally, this dissertation provided a more thorough understanding of earnings management for UK businesses, as well as some practical consequences for researchers, board directors, and financial users.