Executive Compensation Structure and Earnings Management of Listed Insurance Companies in Nigeria

Abstract

This study examines the effect of executive compensation structure on accrual-based earnings management in quoted insurance companies in Nigeria. Motivated by increasing concerns about financial reporting credibility and the role of managerial incentives in shaping reporting behavior, the study investigates how individual components of executive pay base salary, bonuses, stock/equity-based incentives, long-term incentives, and perquisites influence discretionary accruals. The study is anchored on Agency Theory and Signaling Theory, which explain how performance-linked compensation may motivate managers to manipulate reported earnings to maximize rewards or send favorable signals to stakeholders. The research adopted an ex post facto design using secondary data obtained from annual reports of insurance companies listed on the Nigerian Exchange Group (NGX). Discretionary accruals, estimated through the Modified Jones Model, served as the proxy for earnings management. Panel regression techniques were employed to determine the effect of executive compensation components on earnings management, while company size was introduced as a control variable. The findings reveal that bonuses and stock/equity-based incentives exert a positive and significant influence on discretionary accruals, indicating that performancelinked compensation motivates managers to engage in earnings manipulation. Conversely, base salary and long-term incentives show no significant relationship with earnings management, suggesting that fixed and multi-year pay do not encourage opportunistic financial reporting. Perquisites also demonstrate limited influence on managerial discretion. Company size exhibits a significant negative effect, implying that larger firms, due to stronger monitoring and regulatory oversight, are less prone to earnings manipulation. The study concludes that the structure of executive compensation plays a crucial role in shaping earnings management behavior in Nigerian insurance companies. It recommends that boards and regulators re-evaluate incentive-based compensation schemes, strengthen corporate governance mechanisms, and promote transparency in executive pay disclosure to minimize earnings manipulation and enhance financial reporting integrity.