Using Sales Revenue as a Performance Measure

• In Event: Executive Compensation

Abstract

Sales revenue is a primary driver of firm value and commonly employed in compensation contracts as a performance measure, yet extant research has not explored the factors that influence its use in setting executive pay, nor the potential effects this choice may have on other firm decisions. We address this void in the literature by empirically examining the economic determinants of using sales revenue as a performance metric in executive annual bonus contracts and its implications for firms’ investment decisions. We find that the use of revenue as a performance metric is positively associated with sales persistence, the value relevance of revenue, and the corporate strategy of the firm. In particular, we find that firms following a “prospector” strategy are significantly more likely to explicitly reward executives on revenue performance. We further find that the use of revenue as a performance measure is significantly associated with increased M&A activity and R&D investment, consistent with the strategic objectives of prospector firms. Our results provide evidence that firms may effectively signal corporate strategy through accounting performance measure choice.

Authors

• Rong Huang, Baruch College–CUNY

• Carol Marquardt, Baruch College–CUNY

• Bo Zhang, School of Business, Renmin University of China