Relative Performance Evaluation in CEO Compensation: A Talent-Retention Explanation
Journal of Financial and Quantitative Analysis, Forthcoming
43 Pages Posted: 5 May 2014 Last revised: 11 Jul 2019
Date Written: May 28, 2019
Relative performance evaluation (RPE) in CEO compensation can be used as a commitment device to pay CEOs for their revealed relative talent. We find evidence consistent with the talent-retention hypothesis, using two different approaches. First, we examine the RPE terms in compensation contracts and document features that are consistent with retention motives. Second, using a novel empirical specification for detecting RPE, we find RPE is less prevalent when CEO talent is less transferrable: among specialist CEOs, founder CEOs, and retirement-age CEOs, as well as in industries and states where the market for CEO talent is more restrictive.
Keywords: CEO Compensation, Relative Performance Evaluation
JEL Classification: G30, G34, J33, M12, M52
Suggested Citation: Suggested Citation