Exposure to Common Shocks and Relative Performance Evaluation in CEO Compensation Contracts

89 Pages Posted: 8 May 2020 Last revised: 11 Oct 2023

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: October 10, 2023

Abstract

A fundamental but not thoroughly investigated 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 firms positioned more centrally or upstream in the supply network face greater ex ante exposure to exogenous common shocks. This paper investigates the impact of firms’ network positions on the use of RPE in CEO compensation. Taken together, our results indicate that a firm’s ex ante exposure to exogenous common shocks, as uniquely measured by its centrality or upstreamness, is an important determinant of the use, intensity, and implementation of RPE in CEO compensation contracts.

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

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

Suggested Citation

Wu, YiLin and Ieong, Lok-Si and Thomas, Shawn, Exposure to Common Shocks and Relative Performance Evaluation in CEO Compensation Contracts (October 10, 2023). 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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