The widespread use of accounting-based incentives to determine executive compensation is controversial for which one of the following reasons?

Question

Quizplus · Accepted Answer

The widespread use of accounting-based incentives to determine executive compensation is controversial because executives can use their discretion over the accounting policies, which can lead to manipulation of financial statements to artificially increase earnings and trigger higher bonuses. This can lead to a focus on short-term financial gains rather than long-term business success. Additionally, earnings growth does not necessarily automatically increase shareholder value, and managers may have some accounting flexibility depending on the company's policies and financial reporting regulations.

The Widespread Use of Accounting-Based Incentives to Determine Executive Compensation