By reviewing the theory underlying the design and interdependency of management control systems, I highlight the important role firm dynamics plays in our understanding of these control systems. I provide both theoretical and empirical extensions encouraging authors to explore more longitudinal studies to better understand the path dependency of control system design, how control system elements vary over time within a firm, and how the interdependent nature of individual control elements might vary.

Academic and anecdotal evidence indicates that incentive systems often provide short‐term payouts without regard for long‐term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance‐based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post‐ FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre‐ FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post‐ FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post‐ FIN No. 48 period.

We investigate the extent to which market participants use compensation payouts released in the DEF 14A proxy statement (DEF14A) to assess future firm performance by examining sell‐side analysts' earnings forecasts. Consistent with prior work, we confirm that CEO compensation unexplained by current observable economic factors is positively associated with future firm performance. We find that both the likelihood that analysts revise their forecasts following release of the DEF14A and the magnitude and direction of analysts' forecast revisions are positively associated with unexplained CEO compensation. These associations are stronger after the SEC required additional compensation‐related disclosures in late 2006 but lower if the firm has weak corporate governance or more precise other information. Analysts' reactions are not complete, however. Analysts' forecast errors measured months after the DEF14A release are associated with past unexplained compensation, especially in the pre‐2006 period and for analysts who do not revise at the DEF14A release. Taken together, our results suggest that compensation payouts released in the DEF14A contain useful forward‐looking information that is recognized by at least some sophisticated market participants and that the increased disclosure regulations assisted market participants in incorporating this information.