Performance Peer Groups in CEO Compensation Contracts

Financial Management, Forthcoming

42 Pages Posted: 6 Apr 2020

See all articles by Tor-Erik Bakke

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance

Hamed Mahmudi

University of Delaware - Department of Finance

Ashley N. Newton

University of Oklahoma - Michael F. Price College of Business

Date Written: August 20, 2019

Abstract

We take advantage of comprehensive panel data available as a result of the 2006 SEC disclosure rules on relative performance evaluation (RPE) to (i) better understand how firms choose performance peer groups used in CEO RPE contracts and (ii) to investigate the causal impact of mandatory disclosure on the peer selection process. We find that while firms for the most part choose performance peers to better identify their CEOs’ impact on firms’ performance, they also tend to select underperforming peers. Dynamically, we find that peers that are added and retained every year are weaker than ones that were not chosen. These findings suggest managers may have some influence on the choice of performance peers. Lastly, using a quasi-natural experiment we find that the enhanced disclosure did not affect the tendency of firms to select underperforming peers.

Keywords: Executive Compensation, Relative Performance Evaluation, Performance Peer Group

JEL Classification: G34, J33, J41, D86

Suggested Citation

Bakke, Tor-Erik and Mahmudi, Hamed and Newton, Ashley N., Performance Peer Groups in CEO Compensation Contracts (August 20, 2019). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3552943

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
6087707753 (Phone)

HOME PAGE: http://https://sites.google.com/site/tebakke/

Hamed Mahmudi (Contact Author)

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Ashley N. Newton

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States
405-325-5591 (Phone)
405-325-5491 (Fax)

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