Exposures to Common Shocks Along Supply Chains and Relative Performance Evaluation in CEO Compensation Contracts

88 Pages Posted: 8 May 2020 Last revised: 30 May 2024

See all articles by YiLin Wu

YiLin Wu

National Taiwan University - Department of Economics

Lok-Si Ieong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business

Date Written: May 30, 2024

Abstract

A fundamental prediction from principal-agent theory is that firms facing greater ex ante exposures to exogenous common shocks should more frequently utilize relative performance evaluation (RPE) in CEO compensation contracts. Recent advances in modeling the economy as a supply network consisting of sectors connected through input-output linkages establish that industries positioned more centrally or upstream face greater ex ante exposures to exogenous common shocks propagating through the network. This paper investigates the impact of firms' network positions on the use of RPE in CEO compensation. We find that firms in industries positioned more centrally or upstream use RPE more frequently and base greater fractions of CEO pay on RPE. We also document that network positions explain variation in firms' RPE-plan implementation via selection of peers. Our findings are consistent with boards using RPE to filter from CEO pay exogenous shocks to firm performance inherent in firms' supply network positions.

Keywords: Network centrality, Upstreamness, Suppliers, Relative performance evaluation, CEO Compensation, Input–output linkages, Peer groups

JEL Classification: D22, D23, J33, J41, M52

Suggested Citation

Wu, YiLin and Ieong, Lok-Si and Thomas, Shawn, Exposures to Common Shocks Along Supply Chains and Relative Performance Evaluation in CEO Compensation Contracts (May 30, 2024). Available at SSRN: https://ssrn.com/abstract=3576090 or http://dx.doi.org/10.2139/ssrn.3576090

YiLin Wu

National Taiwan University - Department of Economics ( email )

21 Hsiu Chow Rd
Taipei, 10020
Taiwan

Lok-Si Ieong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://www.richardlsieong.com

Shawn Thomas (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

246 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1648 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~shthomas/index.htm

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