793 THE ACCOUNTING REVIEW Vol. 77, No. 4 October 2002 pp. 793–819 Executive Target Bonuses and What They Imply about Performance Standards Raffi J. Indjejikian University of Michigan Dhananjay (DJ) Nanda Duke University ABSTRACT: We provide evidence that CEOs’ and lower-level business unit executives’ target bonuses are negatively associated with a proxy for mea- surement noise in accounting-based performance measures, and positively associated with proxies for firms’ growth opportunities and the extent of ex- ecutives’ decision-making authority. Non-CEO executives’ target bonuses are also positively associated with their CEO’s target bonus. In addition, we compare executives’ actual and target bonuses over two consecutive periods to draw inferences about how firms revise executives’ performance standards. If firms adjust performance standards to fully reflect executives’ past performance, then we expect an executive’s chances of earn- ing an above-target bonus to be independent of his past performance. We find evidence to the contrary; an executive is more likely to receive an above- target bonus if he received an above-target bonus in the prior year than if he did not. This suggests that firms do not adjust standards to fully reflect ex- ecutives’ past performance, consistent with agency-theoretic arguments that a firm can better motivate its executives if it discounts executives’ past per- formance in setting their future compensation. Keywords: bonus plans; incentive compensation; performance standards; targets. Data Availability: The data used in this study are from private sources listed in the text. This paper has benefited from many discussions with Robert Bushman and Abbie Smith. We also thank workshop participants at University of Chicago, Columbia University, Duke-UNC 2000 Fall Camp, University of Georgia, The University of Iowa, London Business School, Michigan State University, University of Rochester, and The University of Texas at Austin, as well as two anonymous reviewers for helpful comments and suggestions. We also gratefully acknowledge the contribution of Hewitt Associates LLP for providing executive compensation data. Submitted January 2001 Accepted June 2002