Relative Performance Evaluation in CEO Compensation: A Non-Agency Explanation
60 Pages Posted: 5 May 2014 Last revised: 1 Jan 2018
Date Written: December 31, 2017
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: Suggested Citation