Supply Network Linkages and CEO Compensation Contracts

77 Pages Posted: 8 May 2020 Last revised: 15 May 2020

See all articles by Lok-Si Ieong

Lok-Si Ieong

National Taiwan University - Department of Economics

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business

YiLin Wu

National Taiwan University - Department of Economics

Date Written: May 13, 2020

Abstract

This paper investigates the impact of firms’ positions in the network of intersectoral input-output linkages on the use and implementation of relative performance evaluation (RPE) plans in CEO compensation contracts. Consistent with a fundamental but not thoroughly investigated prediction from principal-agent theory, we find that firms positioned more centrally or more upstream in the supply network and, hence, more exposed to exogenous common shocks, are significantly more likely to compensate CEOs based on firm performance measured relative to groups of benchmark firms. Further, more central or upstream firms are significantly more likely to measure performance relative to broad indices of firms as opposed to small groups of self-selected peer firms. Taken together, these results are consistent with boards of directors using RPE to filter out common shocks transmitted through supply network linkages in order to more accurately assess CEO performance and to partially insure CEOs against compensation risk.

Keywords: Network centrality, Upstreamness, Suppliers, Relative Performance Evaluation, CEO Pay, Absolute performance evaluation, Peer groups

JEL Classification: D22, D23, J33, J41

Suggested Citation

Ieong, Lok-Si and Thomas, Shawn and Wu, YiLin, Supply Network Linkages and CEO Compensation Contracts (May 13, 2020). Available at SSRN: https://ssrn.com/abstract=3576090 or http://dx.doi.org/10.2139/ssrn.3576090

Lok-Si Ieong

National Taiwan University - Department of Economics ( email )

21 Hsiu Chow Rd
Taipei, 10020
Taiwan

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

YiLin Wu

National Taiwan University - Department of Economics ( email )

21 Hsiu Chow Rd
Taipei, 10020
Taiwan

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