The relation between nonrecurring accounting transactions and CEO cash compensation

This study investigates the role of alternative earnings components in the CEO cash compensation function. We find that cash compensation is significantly positively related to above the line earnings, as long as results are positive. Compensation is shielded from the effects of above the line losses. Similarly, nonrecurring transactions that increase income flow through to compensation, but nonrecurring losses do not. This effect is noted for gains and losses that arise both from extraordinary transactions, discontinued operations and nonrecurring items that do not qualify for below the line presentation. Thus, the data tell a remarkably consistent story: gains flow through to compensation, but losses do not. The classification of the gain or loss on the income statement is of relatively little importance.