The treatment of special items in determining CEO cash compensation

Prior literature documents that CEOs are rewarded for any positive component of income and are partially shielded from negative special items. However, the incidence of and rules pertaining to nonrecurring items significantly changed over the last two decades, calling for a reassessment of earlier research. This paper finds that executives now benefit less from positive nonrecurring items and are penalized more for negative special items, compared to earlier periods. The predictive value of the components of income helps explain this shift. Hand-collected data indicates that compensation committees are more likely to include a component of income that can predict future earnings in their CEO bonus performance measures. Changes in the predictive value of the nonrecurring components of income over time contribute to shifts in their treatment in calculating CEO pay.