Compensation contracts is one of the tools recommended by theorists and scholars towards ensuring that directors perform their function of effective monitoring of an organisation. However, this may induce earnings management (EM) practices as a result of being tied to accounting earnings or stock prices. The study thus evaluated the effect of directors’ compensation on EM practices within the Nigerian banking sector anchored on the Agency Theory. Adjusted population of eleven listed commercial banks was used as the census sampling method was employed. Directors’ compensation was measured using a mix of executive directors and non-executive directors (NEDs) compensation while EM practices was proxy by discretionary provision for loan loss (DPLLs) measured using the Beaver and Engel (1996) model. Using the ordinary least square (OLS) regression, all forms of directors’ compensation except executive compensation were found to have positive effect on EM practices. However, only NEDs fees and allowances was found to have a significant effect on EM practices necessitating the regulation of directors’ compensation. The study concluded that directors’ compensation does affect EM practices of listed banks in Nigeria though to varying extent depending on the kind of compensation. The study recommended a shift of focus from just Chairman compensation to include the totality of NEDs compensation and an institution of guidelines for mandatory disclosure of directors’ compensation. The study thus provides practical contribution for regulatory authorities towards ensuring that the accounting process is rid of EM practices as well as investors by consolidating confidence in the Nigerian banking sector.
