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.

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.

Compensation contracts for multiple agents with helping effort under bilateral moral hazard

2021 ◽  
Vol 40 (1) ◽  
pp. 271-293
Author(s):  
Xiulan Wang ◽  
Xiaoli Wu
Keyword(s):  
Performance Evaluation ◽  
Moral Hazard ◽  
Optimal Strategy ◽  
Stackelberg Game ◽  
Contract Design ◽  
Relative Performance ◽  
Relative Performance Evaluation ◽  
Multiple Agents ◽  
Compensation Contracts ◽  
Personal Performance

This paper aims to investigate the compensation contract design problem consisting of a risk neutral firm and two risk averse workers with and without helping effort in the presence of bilateral moral hazard by Stackelberg game in the framework of principal-agent theory. Three classes of contract models are established in three modes, which reflect whether helping effort takes place between both workers and whether personal performance evaluation contract or relative performance evaluation contract is applied by the firm. By solving models, optimal efforts of the firm, optimal individual and workgroup incentive coefficients, optimal personal effort and helping effort, and the firm’s expected profit are deduced in different modes. In addition, a numerical experiment is investigated by focusing on the impacts of effort cost coefficients of the firm and the worker, and bilateral moral hazard on optimal compensation contracts and profit of the firm in three modes, which provide some valuable management insights about optimal strategy for the firm. The main findings show that the relative performance evaluation contract works better than the personal performance evaluation contract when the two workers is cooperative, which means that helping effort takes place between the two workers. Furthermore, a higher marginal contribution can motive the worker to make more helping effort for her partner, thus achieving win-win outcome based on the relationship of cooperation. For the firm, the optimal strategy is to design the relative performance evaluation contract for both workers and motivate them to make cooperative relationship by exerting helping effort under bilateral moral hazard. Moreover, bilateral moral hazard decreases the motivations of the workers but increases the firm’s profit. This proposed work contributes to the investigation of compensation contract design by combining three critical factors, that is, multiple agents, bilateral moral hazard, and helping effort. The findings provide some theoretical guidance on how to set up optimal mechanism between the firm and multiple agents in the presence of bilateral moral hazard and how to reduce the adverse influence of bilateral moral hazard on participants’ profits.

scholarly journals Relative Performance Evaluation in CEO Compensation: A Talent-Retention Explanation

2019 ◽  
Vol 55 (7) ◽  
pp. 2099-2123 ◽  
Author(s):  
David De Angelis ◽  
Yaniv Grinstein
Keyword(s):  
Performance Evaluation ◽  
Ceo Compensation ◽  
Chief Executive ◽  
Relative Performance ◽  
Retirement Age ◽  
Relative Performance Evaluation ◽  
Compensation Contracts ◽  
Talent Retention ◽  
Ceo Talent ◽  
Commitment Device

Relative performance evaluation (RPE) in chief executive officer (CEO) compensation can be used as a commitment device to pay CEOs for their revealed relative talent. We find evidence consistent with the talent-retention hypothesis, using two different approaches. First, we examine the RPE terms in compensation contracts and document features that are consistent with retention motives. Second, using a novel empirical specification for detecting RPE, we find RPE is less prevalent when CEO talent is less transferrable: Among specialist CEOs, founder CEOs, and retirement-age CEOs, as well as in industries and states where the market for CEO talent is more restrictive.

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.

Sign in / Sign up

Export Citation Format

Share Document