Non-financial Performance Measures and CEO Compensation: An Analysis of Web Traffic

This paper investigates the role of non-financial performance measures in executive compensation. Using a sample of Internet firms we document that web traffic, an important non-financial measure for firms in the Internet industry, is positively associated with CEO total compensation and total change in CEO wealth. This association is robust to controlling for traditional financial performance measures such as return on assets and stock returns and other economic determinants of CEO compensation. This evidence is consistent with the hypothesis that non-financial measures provide incremental information about CEOs' actions over financial measures and hence, receive a positive weight in compensation contracts. We also explore cross-sectional differences in the importance of non-financial performance measures. In contrast to prior work, we find that the weight on non-financial measures increases with the extent of CEO power. This supports the hypothesis that powerful CEOs are more likely to be compensated based on non-financial performance measures that they can influence or manipulate. Consistent with prior evidence, we find that the weight on non-financial performance measures increases with the noise in market-based performance measures.

[1]  Ross L. Watts,et al.  The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies , 1992 .

[2]  David F. Larcker,et al.  AN ANALYSIS OF THE USE OF ACCOUNTING AND MARKET MEASURES OF PERFORMANCE IN EXECUTIVE-COMPENSATION CONTRACTS , 1987 .

[3]  Madhav V. Rajan,et al.  The choice of performance measures in annual bonus contracts , 1997 .

[4]  Richard G. Sloan.  Accounting earnings and top executive compensation , 1993 .

[5]  E. Ziegel,et al.  Balanced Scorecard , 2019, Encyclopedia of Public Administration and Public Policy, Third Edition.

[6]  Gerald A. Feltham,et al.  Public Reports, Information Acquisition by Investors, and Management Incentives , 2000 .

[7]  D. Larcker,et al.  Are nonfinancial measures leading indicators of financial performance? An analysis of customer satisfaction , 1998 .

[8]  Srikant M. Datar,et al.  Balancing Performance Measures , 2001 .

[9]  Raffi J. Indjejikian,et al.  Accounting income, stock price, and managerial compensation , 1993 .

[10]  Steven Huddart.  Employee Stock Options , 1994 .

[11]  Robert E. Verrecchia,et al.  Earnings and price-based compensation contracts in the presence of discretionary trading and incomplete contracting , 1995 .

[12]  E. Ziegel,et al.  The Balanced Scorecard , 1998 .

[13]  Robert E. Verrecchia,et al.  Are Performance Measures Other than Price Important to CEO Incentives? , 2000 .

[14]  S. Kotha,et al.  The Relevance of Web Traffic for Stock Prices of Internet Firms , 2000 .

[15]  D. Larcker,et al.  Corporate governance, chief executive officer compensation, and firm performance 1 The financial sup , 1999 .

[16]  Jeffrey B. Liebman,et al.  Are CEOS Really Paid Like Bureaucrats? , 1997 .

[17]  Philippe Jorion,et al.  Valuing executive stock options with endogenous departure , 1995 .

[18]  Brian K. Boyd,et al.  Board control and ceo compensation , 1994 .

[19]  Clifford G. Holderness,et al.  The role of majority shareholders in publicly held corporations: An exploratory analysis , 1988 .

[20]  Rajiv D. Banker,et al.  Sensitivity, Precision, and Linear Aggregation of Signals for Performance Evaluation , 1989 .

[21]  John D. Trudel,et al.  The balanced scorecard: Translating strategy into action: by Robert S. Kaplin and David P. Norton. Boston, MA: Harvard Business School Press, 1996. 322 + xi pages. $29.95 , 1997 .

[22]  R. Banker,et al.  An Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures , 2000 .

[23]  Bengt Holmstrom,et al.  Moral Hazard and Observability , 1979 .

[24]  Raffi J. Indjejikian,et al.  CEO compensation: The role of individual performance evaluation , 1996 .

[25]  Marshall W. Meyer,et al.  Power in Organizations. , 1982 .

[26]  David Yermack,et al.  Do Corporations Award CEO Stock Options Effectively , 1994 .

[27]  Paul R. Milgrom,et al.  Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design , 1991 .

[28]  Brett Trueman,et al.  The Eyeballs Have it: Searching for the Value in Internet Stocks , 2000 .

[29]  Steven E. Salterio,et al.  The Balanced Scorecard: Judgmental Effects of Common and Unique Performance Measures , 2000 .