Do Growth Options Firms Use Less Relative Performance Evaluation?

Abstract:     
This paper hypothesizes that the use of relative performance evaluation (RPE) as an incentive mechanism varies negatively with a firm's level of growth options. I study two mechanisms by which the level of growth options affects RPE usage: (i) for firms with high levels of growth options, peer performance is a less informative measure of external shocks outside of the CEO's control; and (ii) RPE implementation in high growth options firms is subject to larger influence costs. The evidence supports the hypothesis. The tests use three alternative proxies for growth options, market-to-book value of assets, research and development expenses scaled by assets, and a factor obtained from principal component analysis and control for factors known to affect pay for performance sensitivities.

Keywords: Executive Compensation, Relative Performance Evaluation, Growth Options

JEL Classifications: J33, M41, G31

Working Paper Series