This paper discusses two real effects of financial reporting on pay and incentives: (1) Better earnings leads to better incentives, and (2) If pay is mismeasured, pay can be misused. The first real effect follows from the fact that incentives are often based on earnings, and the effectiveness of earnings-based incentives is positively related to the quality of earnings. Greater use of earnings in incentives provides better incentives at a lower cost. The second real effect has to do with how well the accounting system measures the expense of various pay components. Complex calculations are required to value complex pay components such as options, post-employment benefits, and performance-vested equity, and these calculations have historically not been done correctly. The incorrect accounting leads to these pay components being misused. I conclude by discussing how accounting and disclosure of pay and incentives can be improved.

中文翻译：

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财务报告对薪酬和激励的实际影响

本文讨论了财务报告对薪酬和激励的两个实际影响：(1) 更好的收入会带来更好的激励，以及 (2) 如果薪酬被错误衡量，薪酬可能会被滥用。第一个真正的影响源于这样一个事实，即激励通常基于收益，基于收益的激励的有效性与收益质量正相关。在激励中更多地使用收益以更低的成本提供更好的激励。第二个实际影响与会计系统衡量各种薪酬组成部分的费用有关。需要复杂的计算来评估复杂的薪酬组成部分，例如期权、离职后福利和绩效归属股权，而这些计算历来没有正确完成。不正确的会计会导致这些薪酬成分被滥用。