Why Do Large Positive Non-GAAP Earnings Adjustments Predict Abnormally High CEO Pay?

CEOs of S&P 500 firms that report high non-GAAP earnings relative to GAAP earnings receive more than $600 thousand in unexplained pay. The abnormally high pay appears even after controlling for the level of non-GAAP earnings and despite relatively weak GAAP performance and low returns. Additionally, these firms are more likely to beat the earnings targets specified in their compensation plans and their CEOs have less influence over the board of directors, consistent with managerial opportunism explaining the abnormal pay. Overall, our evidence suggests large non-GAAP earnings adjustments influence boards of directors in approving CEO pay that is otherwise not supported by the firm's fundamental performance. We also note that abnormal pay is about 5% of the total, which means the bulk of the pay likely represents reward for performance. Still, an economically meaningful fraction of CEO pay appears to be attributable to opportunistic non-GAAP reporting