Explicit Relative Performance Evaluation in Performance-Vested Equity Grants
53 Pages Posted: 24 Jan 2009
Date Written: January 23, 2009
Using data from FTSE 350 firms, we examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide exploratory evidence on whether the use or characteristics of RPE are associated with efforts to improve incentives by removing common risk, other economic factors discussed in the RPE literature, or external pressure to implement RPE. We find that many of these economic factors, including common risk reduction, are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors or others is associated with plans with more stringent overall RPE 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. And, we find evidence that vesting percentages vary in RPE and non-RPE plans.
Keywords: Compensation, equity incentives, relative performance, corporate governance
JEL Classification: G34, J33, M40, M41, M46, M52
Suggested Citation: Suggested Citation