3.2. Categorization of the use of performance measures
The SEC requires public firms to disclose the terms of top executives’ compensation plans in the annual
proxy statement (typically referred to as the Compensation Committee Report, hereafter the “CCR”).
Before devising coding rules that capture the construct of interest, I obtained and read a sample of CCRs.
Anatural division in the use of measures in bonus compensation is whether the plan emphasizes traditional
financial measures or whether the plan complements the traditional financial measures with non-financial
measures. Examples of traditional financial measures are earnings per share and profitability. Examples
of non-financial measures include customer and employee satisfaction.10 The sample is heavily weighted
towards an emphasis on financial measures since 140 plans are classified in this group while only 37
plans are classified in the latter group.
The second level of demarcation focuses on the actual use of the measures. Within the group of firms
that emphasize financial measures, some plans have an exclusive emphasis on financial measures (119
plans) while other plans include non-financial measures but only after a financial threshold is met (21
plans). Within the plans that use both financial and non-financial measures, a distinction is made if the
plan includes human resource measures (18 plans).11 Thus the use of performance measures in bonus
compensation are categorized as follows: