Relative Performance Evaluation in CEO Compensation: A Non-Agency Explanation

60 Pages Posted: 5 May 2014 Last revised: 1 Jan 2018

See all articles by David De Angelis

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC) Herzliyah

Date Written: December 31, 2017

Abstract

This paper studies why firms use relative performance evaluation (RPE) in CEO compensation. We compare the contractual terms that govern RPE to their theoretical counterparts. In contrast with the prevalent standard agency view, we do not find that RPE is used to remove CEO exposure to common risk. We offer a new rationale for the observed contractual terms based on talent retention and labor market considerations. Consistent with this rationale, we find that RPE is more prevalent when CEO talent is more transferable. Our findings have also implications for the appropriate research design to detect RPE.

Keywords: CEO Compensation, Relative Performance Evaluation

JEL Classification: G30, G34, J33, M12, M52

Suggested Citation

De Angelis, David and Grinstein, Yaniv, Relative Performance Evaluation in CEO Compensation: A Non-Agency Explanation (December 31, 2017). Available at SSRN: https://ssrn.com/abstract=2432473 or http://dx.doi.org/10.2139/ssrn.2432473

David De Angelis (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://www.de-angelis.com

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall
Ithaca, NY 14853
United States
607-255-8686 (Phone)
607-254-4590 (Fax)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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