Relative performance evaluation and related peer groups in executive compensation contracts

Guojin Gong, Laura Yue Li, Jae Yong Shin

Research output: Contribution to journalArticle

58 Citations (Scopus)

Abstract

This study examines the explicit use of relative performance evaluation (RPE) in executive compensation contracts and the selection of RPE peers. Using S&P 1500 firms' first proxy disclosures under the SEC's 2006 executive compensation disclosure rules, we find that about 25 percent of our sample firms explicitly use RPE in setting executive compensation. We demonstrate that a lack of knowledge of both actual peer-group composition and the link between RPE-based performance targets and future peer performance significantly hinder the traditional implicit test from detecting RPE use. We also find that firms consider both costs and benefits of RPE as an incentive mechanism when deciding to use RPE. Finally, both efficient contracting and rent extraction considerations influence RPE peer selection, with the relative importance of these competing considerations depending on RPE firms' performance.

Original languageEnglish (US)
Pages (from-to)1007-1043
Number of pages37
JournalAccounting Review
Volume86
Issue number3
DOIs
StatePublished - May 1 2011

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Executive compensation
Peer group
Relative performance evaluation
Peers
Disclosure
Group composition
Relative importance
Firm performance
Rent extraction
Evaluation use
Incentive mechanism
Costs and benefits
Contracting

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Gong, Guojin ; Li, Laura Yue ; Shin, Jae Yong. / Relative performance evaluation and related peer groups in executive compensation contracts. In: Accounting Review. 2011 ; Vol. 86, No. 3. pp. 1007-1043.
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Relative performance evaluation and related peer groups in executive compensation contracts. / Gong, Guojin; Li, Laura Yue; Shin, Jae Yong.

In: Accounting Review, Vol. 86, No. 3, 01.05.2011, p. 1007-1043.

Research output: Contribution to journalArticle

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