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

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