How is Relative Performance Evaluation Incorporated in CEO Compensation Contracts?*
نویسنده
چکیده
We examine how relative performance evaluation (RPE) is incorporated in CEO compensation contracts. We find common features across contracts. First, firms tend to base the awards on the ranking of the CEO relative to peers. Second, the relation between performance and awards is highly nonlinear. And third, the award is based on a performance horizon of around three years. Once these features are incorporated in a panel regression framework, there is strong evidence of RPE in CEO compensation of U.S. firms in the last 21 years. With this framework we revisit different theories for the use of RPE and shed new light on the relevance of RPE in CEO contracts.
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