Explicit Relative Performance Evaluation in Performance-Vested Equity Grants

46 Pages Posted: 18 Jul 2007 Last revised: 20 Nov 2011

Mary Ellen Carter

Boston College - Department of Accounting

Christopher D. Ittner

University of Pennsylvania - Accounting Department

Sarah L. C. Zechman

University of Colorado at Boulder - Leeds School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2008

Abstract

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.

Keywords: Executive compensation, relative performance evaluation, equity grants

JEL Classification: G34, J33, M40, M41, M46, M52

Suggested Citation

Carter, Mary Ellen and Ittner, Christopher D. and Zechman, Sarah L. C., Explicit Relative Performance Evaluation in Performance-Vested Equity Grants (May 1, 2008). Available at SSRN: https://ssrn.com/abstract=1001467 or http://dx.doi.org/10.2139/ssrn.1001467

Mary Ellen Carter (Contact Author)

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

Sarah L. C. Zechman

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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