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

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Author Info
Venkatachalam, Mohan (Stanford U)
Davila, Antonio
Abstract

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.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1675.

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Date of creation: Jan 2001
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Handle: RePEc:ecl:stabus:1675

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  1. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance1," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March. [Downloadable!] (restricted)
  2. Baiman, Stanley & Verrecchia, Robert E., 1995. "Earnings and price-based compensation contracts in the presence of discretionary trading and incomplete contracting," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 93-121, July. [Downloadable!] (restricted)
  3. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August. [Downloadable!] (restricted)
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  4. Bushman, Robert M. & Indjejikian, Raffi J., 1993. "Accounting income, stock price, and managerial compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 3-23, April. [Downloadable!] (restricted)
  5. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December. [Downloadable!] (restricted)
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  6. Bushman, Robert M. & Indjejikian, Raffi J. & Smith, Abbie, 1996. "CEO compensation: The role of individual performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 161-193, April. [Downloadable!] (restricted)
  7. Sloan, Richard G., 1993. "Accounting earnings and top executive compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 55-100, April. [Downloadable!] (restricted)
  8. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September. [Downloadable!] (restricted)
  9. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
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