Relative Performance Evaluation, Sabotage and Collusion

Abstract

We examine whether the potential for costly sabotage is a deterrent to firms' use of relative performance evaluation ("RPE") in CEO pay plans. We exploit illegal cartel membership as a source of variation in the potential for costly sabotage and document that firms are more likely
to use RPE if they are currently cartel members. Moreover, firms frequently drop RPE from their CEOs' pay plans immediately after their cartels are detected, convicted and punished. We further provide suggestive evidence that the potential for costly sabotage explains these patterns; cartel membership severs the empirical association between RPE and competitive aggression.

Keywords: Compensation, Collusion, Cartels, Managerial Incentives, Relative Performance Evaluation, Sabotage

JEL Classification: D21, D22, D43, G30, G35