Are They Valued by the Board? An Investigation of Relative Performance Evaluation of Chief Information Officers

43 Pages Posted: 13 Apr 2010

See all articles by Nan Hu

Nan Hu

Stevens Institute of Technology - School of Business

Ling Liu

University of Wisconsin Eau Claire

Jianhui Huang

Singapore Management University - School of Information Systems

Vallabh Sambamurthy

Michigan State University - Department of Accounting & Information Systems

Date Written: April 10, 2010

Abstract

In this study, building upon the relative performance evaluation framework and agency theory we study issues related to long-term as well as short-term compensation for CIOs. We reveal that long-term CIO compensation is linked to a firm’s stock performance while short-term CIO compensation is linked to a firm’s accounting performance. Our findings reveal that CIOs are treated by board members as a long-term intangible value creation asset that drives firm capital market valuation. Furthermore, we investigate whether CIO compensation is linked to the performance of its peer group as well. Such a linkage can insulate the CIO from shocks outside of their control and give them incentives to put forth maximum effort. In addition, we study the impact of the Sarbanes-Oxley Act on CIO compensation. Last, based on the analytical results of [16], we study CIO compensation policies of firms facing different investment opportunities. We reveal that there is a non-linear relationship between firms’ investment opportunities and its likelihood of using relative performance evaluation. In other words, it is more likely for those firms with sufficient small or sufficient big investment opportunities to implement relative performance evaluation to compensate their executives. For those firms with mediocre investment opportunities, adopting RPE will give CIOs the incentive to choose the projects for which they are only relatively more talented in comparison to their peer rivals. Whereas, out all of the projects available to the CIO, the shareholders would like the CIO to pick the project that he or she is absolutely most talented at.

Keywords: Relative performance evaluation, CIO, CIO Compensation, Investment Opportunity, Agency theory

Suggested Citation

Hu, Nan and Liu, Ling and Huang, Jianhui and Sambamurthy, Vallabhajosyula, Are They Valued by the Board? An Investigation of Relative Performance Evaluation of Chief Information Officers (April 10, 2010). Available at SSRN: https://ssrn.com/abstract=1587437 or http://dx.doi.org/10.2139/ssrn.1587437

Nan Hu (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Ling Liu

University of Wisconsin Eau Claire ( email )

Eau Claire, WI 54702
United States

Jianhui Huang

Singapore Management University - School of Information Systems ( email )

80 Stamford Road
Singapore, 178902
Singapore

Vallabhajosyula Sambamurthy

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

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