Supply Network Linkages and CEO Compensation Contracts
77 Pages Posted: 8 May 2020 Last revised: 15 May 2020
Date Written: May 13, 2020
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: Suggested Citation