Explicit Relative Performance Evaluation in Performance-Vested Equity Grants
Mary Ellen Carter
Boston College - Department of Accounting
Christopher D. Ittner
University of Pennsylvania - Accounting Department
Sarah L. C. Zechman
University of Chicago - Booth School of Business
May 1, 2008
Using data from FTSE 350 firms, we examine the factors influencing the explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide evidence on the use of RPE either to improve incentives by removing common risk or by linking greater vesting percentages to higher relative performance rankings. We also investigate whether RPE is used to opportunistically increase vesting and/or placate external parties calling for its use. We find that specific RPE conditions vary depending upon whether the plan is used to remove common risk or to promote superior relative performance. However, we find no evidence that greater external monitoring by institutional investors or others is associated with specific RPE performance conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. However, we find no evidence that vesting percentages are higher in RPE plans than in non-RPE plans, and no evidence that RPE is used opportunistically to increase vesting and compensation.
Number of Pages in PDF File: 46
Keywords: Executive compensation, relative performance evaluation, equity grants
JEL Classification: G34, J33, M40, M41, M46, M52
Date posted: July 18, 2007 ; Last revised: November 20, 2011
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