Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence
Rajesh K. Aggarwal
University of Minnesota - Twin Cities - Carlson School of Management
Andrew A. Samwick
Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)
Journal of Finance, Vol. 54
Abstract:
We examine compensation contracts for managers in imperfectly competitive product markets. We show that strategic interactions among firms can explain the lack of relative performance-based incentives in which compensation decreases with rival firm performance. The need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance. Firms in more competitive industries place greater weight on rival firm performance relative to own firm performance. We find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry.
JEL Classification: G30, J33
Accepted Paper Series
Suggested Citation
Aggarwal, Rajesh K. and Samwick, Andrew A., Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence. Journal of Finance, Vol. 54. Available at SSRN: http://ssrn.com/abstract=113509
