Relative performance evaluation and related peer groups in executive compensation contracts

Guojin Gong, Laura Yue Li, Jae Yong Shin

Research output: Contribution to journalArticle

71 Scopus citations

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

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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