Performance Measures and Corporate Innovation

Jacky Chau, Accounting, The Wharton School

Abstract: Performance measurement is an important input to the incentive system. This research seeks to understand the role of performance measurement for senior executives in motivating innovation.

Internally, performance targets are often set with respect to certain performance metrics to gauge the performance of senior executives. These performance metrics may be tied to executive compensation plans such as annual bonus schemes and long-term incentive plans (e.g. performance-vested options or stock units). Externally, investors also try to assess the performance of companies and evaluate their innovative capabilities through impounding their preference and information into share prices. Company executives may be motivated by performance metrics or use the market as a signal in allocating resources between innovative and other productive activities. Using internal performance metrics data collected from the compensation schemes detailed in proxy statements (DEF 14A) as well as a constructed market measure of external performance evaluation, this study employs a large-sample archival studies to examine the association between innovation activities and performance evaluation for senior executives.