Ool of Business University

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 nonfinancial 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.