Explicit Relative Performance Evaluation in Performance-Vested Equity Grants

53 Pages Posted: 24 Jan 2009  

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: January 23, 2009

Abstract

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

Carter, Mary Ellen and Ittner, Christopher D. and Zechman, Sarah L. C., Explicit Relative Performance Evaluation in Performance-Vested Equity Grants (January 23, 2009). Review of Accounting Studies, Vol. 14, No. 2-3, 2009. Available at SSRN: https://ssrn.com/abstract=1332157

Mary Ellen Carter

Boston College - Department of Accounting ( email )

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

Christopher D. Ittner (Contact Author)

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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