Voluntary clawback adoption and the use of financial measures in CFO bonus plans

Firms face a trade-off in the design of their bonus plans between the role of CFOs in financial reporting versus their decision-making duties. Firms can decrease the bonus incentives tied to financial measures to benefit the fiduciary responsibilities of CFOs, but this goes at the expense of motivating their decision making duties. As clawbacks increase the misreporting costs of CFOs through the loss of previously awarded compensation and reputation, we study whether clawback adoption is associated with greater CFO bonus incentives tied to financial measures. From a sample of 6812 firm-year observations from 1384 Russell 3000 firms, where 33 percent have a clawback policy in place, we find that voluntary clawback adoption is associated with greater bonus incentives tied to accounting measures for CFOs. We also find that the positive relation between clawback provisions and CFO bonus incentives tied to accounting measures is weaker for firms characterized by higher relative CEO power, firms with recent internal control material weaknesses, and firms with greater (discretionary) accruals.