Relative Performance Evaluation in CEO Compensation: Evidence from the 2006 Disclosure Rules
53 Pages Posted: 17 Nov 2010 Last revised: 12 Mar 2012
Date Written: December 7, 2011
In December 2006, the Securities and Exchange Commission issued new rules that require the disclosure of the use of relative performance evaluation (RPE) in CEO compensation contracts. We find that about a third of the sample firms use RPE in the CEO compensation contract. On average, RPE users tie about half of the estimated value of the awards to RPE. Firms tie a larger fraction of their awards to RPE when they face less uncertainty regarding the right performance benchmark. We find little evidence to support hypotheses based on product market competition, CEO hedging constraints, or managerial power.
Keywords: CEO Compensation, Relative Performance Evaluation
JEL Classification: G34, G38, J33
Suggested Citation: Suggested Citation