Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section
Posted: 3 Jan 2004
Abstract
Little evidence exists that firms index executive compensation to remove the influence of marketwide factors. We argue that executives can, in principle, replicate such indexation in their private portfolios. In support, we find that market risk has little effect on the use of stock-based pay for the average executive. But executives' ability to "undo" excessive market risk can be hindered by wealth constraints and inalienability of human capital. We replicate the standard result that there is little relative performance evaluation (RPE) for the average executive, but find strong evidence of RPE for younger executives and executives with less financial wealth.
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Todd T. Milbourn
Southern Methodist University (SMU) - SMU Cox School of Business ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States