CEO Power and Relative Performance Evaluation

43 Pages Posted: 20 Aug 2013 Last revised: 27 May 2016

See all articles by Shane S. Dikolli

Shane S. Dikolli

University of Virginia - Darden School of Business

Viktoria Diser

LMU Munich

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Thomas Pfeiffer

University of Vienna - Accounting and Control

Date Written: May 1, 2016

Abstract

We model relative performance evaluation (RPE) when a Chief Executive Officer (CEO) has the power to opportunistically influence the design of RPE by choosing the weight on an index-based peer group or by customizing the selection of peers comprising a peer group. A powerful CEO compares the benefits of reducing common risk affecting his compensation with the benefits of receiving a higher bonus by economizing on expected peer-group performance. The Board of Directors (BoD) is less likely to use RPE if a powerful CEO can influence RPE design. Our analytical model yields hypotheses predicting that powerful CEOs choose to reduce common risk only partially and that BoDs choose to not implement RPE if expected peer performance is sufficiently high. Our model has further empirical implications in (1) providing new interpretations of tests for detecting strong-form and weak-form RPE in the presence of powerful CEOs, and (2) suggesting a new empirical measure of CEO power with a focus on the delegation of RPE decision rights.

Keywords: Relative performance evaluation, Managerial power, Incentive compensation

JEL Classification: M41, M52, J33

Suggested Citation

Dikolli, Shane and Diser, Viktoria and Hofmann, Christian and Pfeiffer, Thomas, CEO Power and Relative Performance Evaluation (May 1, 2016). AAA 2014 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2312650 or http://dx.doi.org/10.2139/ssrn.2312650

Shane Dikolli

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

Viktoria Diser (Contact Author)

LMU Munich ( email )

Institute for Accounting & Control
Geschwister-Scholl-Platz 1
Munich, 80539
Germany

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Thomas Pfeiffer

University of Vienna - Accounting and Control ( email )

Oskar-Morgenstern-Platz 1
Vienna 1090, Vienna
Austria
+43-1-4277-38002 (Phone)
+43-1-4277-38004 (Fax)

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