How Executive Pay Shapes Corporate Decisions

To understand which result a management team may prioritise, look beyond total pay and ask what the incentive award measures. A scorecard does not determine a decision by itself, but it can make some choices more valuable than others.

The short answer

Executive compensation is a useful map of corporate priorities. It shows what is measured, how much weight each result carries, how quickly the payout changes around a target, the measurement period and which items can be removed from the calculation.

We can read the pressure created by the incentive plan through five elements:

Incentive pressure = Metric × Weight × Payout curve × Time horizon × Adjustment rules

Those five elements cannot explain a decision on their own. Strategy, competition, regulation, the balance sheet, investment opportunities and management judgement still matter. But when a large part of pay depends on a small number of measurable targets, the result that receives the most attention can change.

This does not mean that an incentive target causes a corporate decision. It means that the target can make some decisions more attractive to management than others.

Read the scorecard before the strategy slogan

Two companies can both claim to focus on profitable growth while paying their executives for different results.

One company may link the annual bonus to revenue. Another may emphasise operating profit, free cash flow or return on invested capital. A third may tie a long-term equity award to earnings per share and total shareholder return relative to peers.

Each metric can create a different pressure:

Metric	What it emphasises	How the short-term result might be supported	What to check
Revenue	Growth and scale	Discounts or expensive customer acquisition can raise revenue	Pricing, margins and customer acquisition cost
Operating profit	Profitability in the core business and cost discipline	Research, hiring or maintenance spending can be delayed	Research expense, headcount and maintenance investment
Earnings per share	Total profit and the share count over which it is spread	A repurchase can reduce average shares	Net income, weighted-average shares, issuance and the repurchase price
Free cash flow	The relationship between operating cash and investment spending	Collections can be accelerated, or payments and investment delayed	Working capital, capital expenditure and one-off cash movements
Return on invested capital	The profit generated by the capital used	New investment can be delayed or some capital items excluded from the definition	The company's definition, acquisitions and restructuring items
Relative total shareholder return	Share performance against a selected peer group	Falling less than a weak sector can still look strong on a relative basis	Peer group, measurement dates, absolute return and any loss cap

These possibilities do not prove that every company will behave in the same way. A metric only shows which outcome is easier to reward. The economic quality of the decision must be tested separately.

The metric alone is not the contract

An incentive plan usually has a threshold, a target and a maximum payout. How pay changes between those points can matter as much as the name of the metric.

Consider a purely illustrative example. The plan pays nothing below 90% of target, pays the full target award at 100% and pays twice the target award at 110%. Under that curve, a small change immediately around the target can be more valuable to an executive than a larger improvement far away from it.

This is not McKesson's or O'Reilly's actual payout curve. Investors must read the thresholds and payout table in each company's own filing.

The time horizon also changes the pressure. A one-year EPS target is not the same as a three-year cumulative EPS target. A three-year goal does not guarantee long-term quality, but it creates a longer decision window than a one-year result.

Ask five questions together:

What is measured?
How much weight does each metric receive?
Where are the threshold, target and maximum?
Is the measurement period one year or several years?
Which costs, gains and losses can the compensation committee remove?

A familiar giant shows why adjustment rules matter. Johnson & Johnson's 2026 proxy statement says the incentive calculation excluded the effect of an unbudgeted significant share repurchase when it affected adjusted operational EPS by more than 1%. The rule does not neutralize every repurchase; it covers only an unbudgeted, significant effect above that threshold. Nor does the filing prove that the rule changed a corporate decision. It does show that a compensation contract can explicitly limit, rather than silently reward, a material EPS effect from a repurchase.

What does the research find?

Academic evidence supports taking these incentives seriously, but it does not produce an automatic company-level causal verdict.

Bennett, Bettis, Gopalan and Milbourn found a disproportionate number of firms just above compensation goals compared with firms just below. Firms that narrowly exceeded EPS goals had higher abnormal accruals and lower research and development spending.

That is an important relationship, but the paper's own warning matters. Firms that exceed and miss a goal are not randomly assigned to two groups. The authors therefore state that the result should not be interpreted as causal.

Kim and Ng's study in The Accounting Review found that firms were more likely to repurchase shares and spent more when EPS would have fallen just below a bonus threshold without the repurchase. The association also strengthened as the payout slope within the incentive zone became steeper. This supports a relationship between contract design and repurchases; it does not establish the cause of an individual company's decision.

Liu, Lijuan Zhang and Xiu-Ye Zhang's 2026 study found that R&D cuts were more likely in its 2006-2018 US sample when EPS was the primary performance measure in the bonus contract and realised EPS finished just above the target. The relationship weakened when sales or non-financial measures were used alongside EPS. The result is consistent with a multi-metric design limiting pressure, but the observational design does not by itself establish company-level causation.

Young and Yang's study in The Accounting Review found a strong positive association between share repurchases and compensation contracts containing EPS performance conditions. The same study reported settings in which those repurchases could benefit shareholders and found no evidence of broad investment myopia in its sample.

Young and Yang examined UK companies over 1998 to 2006. Their findings should not be transferred mechanically to US companies today. The study still provides an important counterweight: an association between an EPS target and a repurchase does not mean that the repurchase is automatically harmful.

The conclusion is that incentive goals can redirect management attention and make some choices more attractive than others. Whether the final decision is good for the company still depends on price, financing, investment opportunities and balance-sheet capacity.

EPS has two moving parts

Earnings per share can rise because the company earns more, because the average share count falls or because both happen at the same time.

Diluted EPS = Net income attributable to common shareholders / Weighted-average diluted shares

Take a simple company earning $100 million with 100 million shares:

Before a repurchase: $100 million / 100 million shares = $1.00 EPS.
After repurchasing 10 million shares: $100 million / 90 million shares = $1.11 EPS.

Total profit did not change, but EPS rose by 11.1%. This example shows only the arithmetic. A real repurchase reduces cash and can affect interest income, borrowing cost, tax and investment capacity. Employee equity awards and new issuance can also increase the denominator in the opposite direction.

Total repurchase spending is therefore not enough. Investors should also examine how far average shares fell, what the company paid for the stock, how the repurchase was financed and which investments were not made.

McKesson: the link appears in the company's own filing

McKesson's 2026 proxy statement directly connects incentive targets with expected capital deployment.

The financial weights in its fiscal 2026 annual cash incentive were:

Adjusted EPS: 50%.
Adjusted operating profit: 25%.
Free cash flow: 25%.

The long-term award requires an important distinction. In fiscal 2026, performance stock units represented 60% of target long-term incentive value and time-vesting restricted stock units represented the other 40%. Within the completed fiscal 2024 to fiscal 2026 performance-stock-unit payout, the weights were 50% for three-year cumulative adjusted EPS, 25% for average return on invested capital and 25% for relative total shareholder return.

The 50%, 25% and 25% split therefore applied inside the performance-stock-unit component, not across total long-term incentive value. That performance component represented 60% of the target long-term mix.

The strongest documentary evidence is this: McKesson said both its annual adjusted-EPS target and the completed three-year cumulative adjusted-EPS target assumed capital deployment through share repurchases.

That disclosure does not prove that the incentive system caused every repurchase. It does establish that repurchases were incorporated into target setting rather than treated as an unrelated event that appeared later.

McKesson reported three different EPS figures

The same proxy contains three separate fiscal 2026 figures:

$38.38: diluted EPS reported under US accounting rules.
$39.11: adjusted EPS presented by the company to investors.
$38.90: adjusted EPS used by the compensation committee for the incentive calculation.

The calculation table in the proxy appendix starts with the $39.11 adjusted measure and subtracts a net $0.21 incentive-compensation adjustment to reach $38.90. "Adjusted EPS" is therefore not one fixed number. The definition and the intended use matter.

Use $38.90 when examining the incentive result, $39.11 when examining the company's public adjusted performance and the reported $38.38 when linking the financial statements to the share denominator.

What the reported figures imply

McKesson's fiscal 2026 Form 10-K reports:

Net income attributable to McKesson increased from $3.295 billion to $4.762 billion.
Diluted EPS increased from $25.72 to $38.38.
Weighted-average diluted shares fell from 128.1 million to 124.1 million.
The cash-flow statement recorded $4.750 billion of repurchase cash outflow. In its narrative discussion, the company said it returned $4.8 billion of cash through repurchases.
The statement of stockholders' deficit recorded $4.790 billion of total repurchase cost. The $40 million difference was an excise-tax accrual for the period that remained unpaid at year end. McKesson includes this tax in the cost of the shares acquired.

Net income rose by about 44.5%, while reported diluted EPS rose by about 49.2%. Strong profit growth was therefore the main foundation of the EPS increase; the lower average share count added to it.

A simple comparison makes that contribution visible. Dividing fiscal 2026 net income by the fiscal 2025 weighted-average diluted share count of 128.1 million produces about $37.17. The difference between that amount and reported EPS of $38.38 is roughly $1.21, a simplified estimate of the contribution from the lower denominator.

I calculated this from the reported data. It is not the company's reported adjusted measure and it is not the compensation committee's final incentive calculation. It holds net income constant and does not model repurchase timing, financing cost, changes in interest income, tax, new issuance or committee adjustments.

The 124.1 million and 128.1 million figures are also weighted averages over each year, not year-end share counts. Net income and the repurchase cash outflow are annual flows; the statement-level total cost also includes accrued excise tax; the share figure is a period-average denominator. That classification defines what the calculation can and cannot show.

The strongest counterargument: the contract may reflect the strategy

The most serious competing explanation is that the company does not repurchase stock because the board selected an EPS target. The board may select an EPS target because the company already plans to return surplus cash through repurchases.

Under that explanation, the contract records a pre-existing strategy instead of causing it. Undervaluation, limited organic investment opportunities, surplus cash, borrowing capacity or acquisition plans could also explain the same choice.

McKesson's filing does not solve this selection problem. It proves that repurchases were built into the target. It does not show what McKesson would have done without the incentive system.

O'Reilly: the same choice can emerge from a different annual scorecard

According to O'Reilly Automotive's 2026 proxy statement, the weights in its 2025 annual cash incentive were:

Comparable-store sales: 40%.
Operating income: 40%.
Return on invested capital: 20%.

EPS was not in that annual cash scorecard. O'Reilly nevertheless repurchased $2.10 billion of shares in 2025. It also spent $1.17 billion on capital expenditure and opened 207 net new stores.

O'Reilly says it returns remaining capital through repurchases after funding high-return reinvestment opportunities. That is management's statement. Testing its economic validity requires examining new-store returns, future growth opportunities, the balance sheet and the price paid for the stock.

O'Reilly is not a clean experiment or a matched comparison with McKesson. Executives also receive equity, so their pay is not completely detached from the share price. The example has a narrower value: a large repurchase can occur without EPS in the annual cash plan. Seeing the repurchase alone is not enough to identify its cause.

How to investigate a company in 15 minutes

1. Find the proxy statement

For a US-listed company, open the latest DEF 14A in the SEC's EDGAR system. Investor.gov provides a short guide to locating the filing.

Search the document for "annual incentive", "performance metrics", "performance stock unit", "threshold", "target", "maximum" and "adjustments".

2. Rebuild the scorecard

Record each metric, its weight, measurement period and payout range. Separate the annual cash incentive, performance-based equity and equity that vests only with time. Do not read a 50% weight inside one component as 50% of total pay.

3. Compare definitions

Put the reported result, the adjusted result shown to investors and the adjusted result used for compensation on separate lines. Even two measures carrying the same "adjusted" label can be different.

4. Test the decision in the financial statements

For an EPS-linked plan, compare net income, EPS, weighted-average shares, year-end shares, repurchase spending and share-based compensation.

5. Ask what was not done

Compare repurchases with capital expenditure, research spending, acquisitions, debt reduction and balance-sheet strength. Include the repurchase price. The same transaction can create value below a reasonable estimate of worth and destroy it above that level.

Seven questions before drawing a conclusion

Is the metric tied to the annual bonus, performance equity or both?
How much of total compensation does the metric actually affect?
How steep is the payout curve around the target?
Does the company explain how repurchases enter the target?
Are reported, adjusted and incentive-calculation results the same?
Why did EPS grow faster or more slowly than total profit?
Do investment, the balance sheet and the repurchase price support the quality of the decision for shareholders?

These questions do not produce an automatic verdict. They turn a compensation disclosure into a testable investment hypothesis.

What would change the conclusion?

The thesis would strengthen if a credible study isolated a compensation-contract change outside the company's control and showed that repurchase or investment behaviour changed afterward. Such a design would also need to separate surplus cash, valuation, debt, investment opportunities and board selection.

The thesis would narrow if broader evidence showed that removing the incentive design did not reduce the ability to explain the behaviour. If the company would have chosen the same capital allocation and the contract merely records that policy, the target's independent effect is weaker.

At company level, the decisive evidence would include the actual payout curve, target-setting history, how the incentive result ties back to the company's numbers, repurchase timing and prices, financing, share issuance and foregone investments.

What should readers monitor next?

Whether metrics and weights change in the next proxy statement.
The payout curve around the target and the committee's adjustment authority.
Total repurchase spending against weighted-average and year-end shares.
The difference between reported and adjusted results.
Changes in capital expenditure, research spending, acquisitions and debt reduction over the same period.
Whether the repurchase price is consistent with the company's long-term cash-generating capacity.

Conclusion

Executive compensation is not the single cause of corporate decisions. It is a map of which outcomes may receive more management attention.

McKesson shows that share repurchases can be incorporated into both annual and three-year adjusted-EPS targets. The reported figures also show that a lower average share count added to strong profit growth. That establishes a link, not causation.

O'Reilly shows that the same corporate action can appear without EPS in the annual cash scorecard. Strategy, surplus cash, investment opportunities, valuation and the balance sheet remain part of the explanation.

The right conclusion is not that EPS targets cause bad buybacks. It is that a heavily weighted EPS target can make repurchases more attractive than other uses of capital, especially when the payout rises quickly around the target.

You can read a company's story in its presentation, its behaviour in the cash-flow statement and its priorities in the compensation scorecard. A sound conclusion requires all three.

Methodology and limitations

This guide considers McKesson's 2026 proxy and fiscal 2026 Form 10-K, O'Reilly Automotive's 2026 proxy and 2025 Form 10-K, the limited compensation adjustment disclosed in Johnson & Johnson's 2026 proxy, and four peer-reviewed academic studies. The data cutoff is July 26, 2026 at 15:43 Istanbul time.

Company figures were taken directly from SEC filings. McKesson's reported GAAP EPS, public adjusted EPS and incentive-compensation adjusted EPS were kept separate. Net income and repurchase spending were classified as period flows; weighted-average diluted shares were classified as a period-average denominator. Johnson & Johnson's rule is used only as a contract-design illustration within its disclosed limits, not as a guarantee that all repurchase effects were neutralized or as evidence of a behavioral outcome.

I calculated the $37.17, $1.21, 44.5% and 49.2% figures from the reported data. They use rounded inputs and do not reconstruct repurchase timing, financing cost, tax, issuance or committee adjustments.

This Guide does not replicate the academic papers' datasets, observe board deliberations or infer individual managerial intent. The two company cases illustrate the mechanism and a competing explanation. They do not estimate an average causal effect for a typical company.

Sources and further reading

Not investment advice; for research and educational purposes.