Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence

Posted: 4 Sep 1998  

Rajesh K. Aggarwal

Northeastern University

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

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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

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: https://ssrn.com/abstract=113509

Rajesh K. Aggarwal (Contact Author)

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
603-646-2893 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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