Relative Performance Evaluation and Related Peer Groups in Executive Compensation Contracts

2011 ◽  
Vol 86 (3) ◽  
pp. 1007-1043 ◽  
Author(s):  
Guojin Gong ◽  
Laura Yue Li ◽  
Jae Yong Shin
Keyword(s):  
Performance Evaluation ◽  
Executive Compensation ◽  
Peer Group ◽  
Relative Performance ◽  
Relative Performance Evaluation ◽  
Rent Extraction ◽  
Compensation Contracts ◽  
Performance Targets ◽  
Peer Group Composition ◽  
Selection Of

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.

scholarly journals Do Growth-Option Firms Use Less Relative Performance Evaluation?

2013 ◽  
Vol 89 (1) ◽  
pp. 27-60 ◽  
Author(s):  
Ana Maria Albuquerque
Keyword(s):  
Performance Evaluation ◽  
Peer Group ◽  
Principal Component ◽  
Relative Performance ◽  
Data Availability ◽  
Growth Options ◽  
Relative Performance Evaluation ◽  
Compensation Contracts ◽  
Growth Option ◽  
The Impact

ABSTRACT The use of relative performance evaluation (RPE) in compensation contracts for CEOs at growth-option (GO) firms that operate in more volatile environments can provide insurance against common exogenous shocks and thus reduce the amount of risk that CEOs face. However, the implementation of RPE for high-GO firms can be impaired by these firms' inability to find a peer group that captures common risk exposure. This paper studies GO firms' reliance on RPE and finds that the use of RPE in CEO compensation contracts varies negatively with a firm's level of growth options. The tests use three proxies for growth options: the market-to-book value of assets, research and development expenses scaled by assets, and a factor obtained from a principal component analysis. The results are robust to controlling for the impact of other firm characteristics on pay-for-performance sensitivities. Data Availability: All data are obtained from publicly available sources.

scholarly journals Executive Compensation and Relative Performance Evaluation Relationship Analysis

2020 ◽  
Vol 4 ◽  
pp. 15-26
Author(s):  
Andre Luis Barbosa dos Santos
Keyword(s):  
Performance Evaluation ◽  
Executive Compensation ◽  
Relative Performance ◽  
Public Utilities ◽  
Relative Performance Evaluation ◽  
Relationship Analysis ◽  
Remuneration Policy ◽  
Systematic Component ◽  
Temporal Aspect ◽  
Reference Form

The research objective is to verify if the variable compensation of executives is established based on the relative performance evaluation, based on their abilities, or if there is the so-called "lucky payment", in which they are benefited or harmed by oscillations that affect the entire market. The literature shows that variable remuneration is characterized as one of the main mechanisms to align interests between investors and executives. In Brazil, there is evidence of a relationship between variable remuneration and managers' performance, but a gap to be filled consists of identifying whether or not such remuneration disregards the systematic component of performance, linked to movements and shocks that affect the entire sector. The sample comprises the listed companies listed in B3, except those operating in regulated segments, such as financial institutions and public utilities. The period of analysis comprises the years 2010 to 2015, where the information on remuneration is now disclosed through the Reference Form. After self-selection control, because of companies that filed injunctions to avoid disclosure of executive compensation, evidence indicates that executives are usually paid "by luck." Only when the market performs negatively and the executive performs above it is that relative performance employed. The research assists in a better understanding of the remuneration policy of Brazilian organizations, complementing other research on the temporal aspect and the comparison of the peers' performances in the sectors.

Compensation and Taxes: Evidence from Relative Performance Evaluation

2020 ◽  
Author(s):  
Thomas R. Kubick ◽  
Courtney E. Yazzie
Keyword(s):  
Performance Evaluation ◽  
Relative Performance ◽  
Tax Rates ◽  
Management Compensation ◽  
Relative Performance Evaluation ◽  
Corporate Tax ◽  
Effective Tax Rates ◽  
Compensation Contracts ◽  
Incentive Effects ◽  
Focal Firm

Relative performance evaluation (RPE) is a common practice in compensation contracting, essentially conditioning management compensation on the achievement of certain performance goals relative to a benchmark. In this paper, we examine the incentive effects of RPE usage on tax outcomes. We predict and find that low-tax peers in RPE contracts influence focal firm tax outcomes. Specifically, we find that a greater proportion of low-tax RPE peers embedded in RPE compensation contracts is associated with lower book and cash effective tax rates, and we find evidence that this effect is not confined to RPE peers within the same industry. Moreover, we also find that the tax outcomes incentivized through low-tax RPE peers occurs through RPE grants conditional on achieving after-tax earnings metrics. Overall, our results reveal that RPE provides a meaningful influence on corporate tax outcomes.

Sign in / Sign up

Export Citation Format

Share Document