Ittner, Lambert, and Larcker (J. Accounting Economics (2003) this issue) present compelling evidence that new economy firms rely more on stock-based compensation than do old economy firms, based on 1998 and 1999 data from a proprietary sample of companies. I complement the ILL results by analyzing data over a longer time period (1992–2001) and, more importantly, document the effect of the 2000 market crash on stock-based pay in new economy firms. Finally, I offer evidence supporting the conjecture that differences in pay practices between new and old economy firms reflect accounting considerations, perceived costs, and competitive inertia.

Research in incentives has focused on performance measures and pay-performance sensitivities but has largely ignored the “performance standard”, which generates important incentives whenever plan participants can influence the standard-setting process. “Internally determined” standards are directly affected by management actions in the current or prior year, while “externally determined” standards are less easily affected. I show that companies choose external standards when prior performance is a noisy estimate of contemporaneous performance. In addition, companies using budget based and other internally determined performance standards have less-variable bonus payouts, and are more likely to smooth earnings, than companies using externally determined standards.

Economic theories of efficient compensation predict a positive relationship between executive pay and corporate performance, and yet efforts to document this relationship have been largely unsuccessful. In this paper, we argue that previous cross-sectional studies have omitted important variables which seriously bias their results. Using data that focus on individual executives over time, we find that executive compensation is strongly positively related to corporate performance as measured by shareholder return and growth in firm sales. The results are robust to the stock market performance measure utilized.

Executive compensation consultants face potential conflicts of interest that can lead to higher recommended levels of CEO pay, including the desires to “cross-sell” services and to secure “repeat business.” We find evidence in both the US and Canada that CEO pay is higher in companies where the consultant provides other services, and that pay is higher in Canadian firms when the fees paid to consultants for other services are large relative to the fees for executive-compensation services. Contrary to expectations, we find that pay is higher in US firms where the consultant works for the board rather than for management.

We employ a certainty-equivalence framework to analyze the cost, value and pay/performance sensitivity of non-tradable options held by undiversified, risk-averse executives. We derive “executive value” lines, the risk-adjusted analogues to Black–Scholes lines. We show that distinguishing between “executive value” and “company cost” provides insight into many issues regarding stock option practice including: executive views about Black–Scholes values; tradeoffs between options, restricted stock and cash; exercise price policies; option repricings; early exercise policies and decisions; and the length of vesting periods. It also leads to reinterpretations of both cross-sectional facts and longitudinal trends in the level of executive compensation.