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A CEO’s bonus pay can often be linked with the company’s ability to meet its targeted earnings per share (EPS) goal. But when the market analysts project a company’s EPS to exceed what’s set in its internal goal, does the CEO have an incentive to reach above and beyond?

For those who keep close tabs on corporate finance, that might sound like a basic question.

However, according to from the ������Ƶ School of Management, the answer can be a bit more layered.

Researchers found that regardless of whether the analysts’ EPS forecasts were higher or lower than a company’s internal goals, most CEOs aimed to exceed the forecast amount. In contrast, CEOs would typically only achieve an internal goal if it fell below the analysts’ forecasts. This suggests that the internal EPS goal was accomplished more as an incidental byproduct of meeting the higher forecasted amount.

The takeaway: CEOs place greater weight on achieving analysts’ EPS forecasts than on achieving internal bonus plan goals, even if it means leaving some potential bonus money on the table.

“An underlying idea is that you don’t want to outperform your targets by too much because if you do, you’ve raised the bar higher for the next year,” said Jason Xiao, assistant professor of accounting, who conducted the study alongside other researchers.

“Conversations about this subject generally center on whether CEOs are paid too much,” Xiao said, “so if you’re going to give them a certain payment scheme, you should incentivize them by setting goals that work in the best interest of the company and shareholders.”

One way to accomplish that could be to tweak the CEO’s compensation contract to clearly reflect how they strive for the analysts’ forecasts more heavily than the internal targets, according to the research.

The study examined CEO payment disclosures from 276 unique firms from 2006 through 2020.

Based on that, Xiao said, researchers collected data from nearly 1,000 observations with the same or similar EPS computations for analysts’ forecasts and the CEOs’ bonus plan objectives. This requirement allowed for a fair comparison of EPS levels between analysts’ forecasts and firms’ bonus plan goals.

The research found that if a company’s internal EPS target proved higher than the EPS projected by market analysts, CEOs would primarily aim to achieve only the lower forecasted EPS amount.

While CEOs’ bonus pay may be based on earnings per share, Xiao said, a significant portion of their compensation often depends on the firm’s stock price. An important factor in determining stock price is whether or not the company can beat the analyst forecast.

“If they have more of their pay tied to that forecast, as opposed to the internal type of targets, they’ll care more about the analysts’ amount,” Xiao said. “Based on this finding, we felt it demonstrates the importance of considering both types of pay together because only then would you more clearly understand that CEOs often hit their internal target only while on their way to hitting the other one.”