Prior literature has documented ratcheting targets and a potential adverse incentive problem it may cause, and, as a remedy to the problem, proposed a firm's commitment to incomplete use of past performance in setting future targets. In this paper, we examine whether a firm makes such a...

We examine the extent to which firms use past performance as a basis for setting earnings targets in their bonus plans and assess the implications of such targets for managerial incentives. We find that high-profitability firms commonly reduce earnings targets when their managers fail to meet...