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Executive compensation is frequently discussed and criticized by the media, lawmakers, regulators, experts, and the public. The primary issue that companies face when compensating executives is how to align the goals of executives with the goals of various stakeholders in order to motivate executive decisions that increase the value of the company to shareholders, employees, the public, regulators, and others. Academics find that executives’ interests are often best aligned by making compensation contingent on company performance. One method of compensating executives that is frequently discussed is comparing a company’s performance to that of a peer group of companies. This type of incentive is referred to as relative performance evaluation (RPE).The use of RPE in executive compensation is appealing for both executives and shareholders. The appeal for executives is that an incentive can be earned even when performance is weak, as long as it exceeds peers’ performance. Also, when companies offer RPE incentives, shareholders are less likely to pay executives for luck. Finally, many consider RPE incentives to be fairer and more justifiable than other types of incentives.This research examines the use of RPE incentives in CEOs’ compensation contracts among large publicly-traded companies. Our sample includes more than 100 companies across several years. We use hand-collected data from proxy statements filed with the Securities and Exchange Commission to determine the extent of use of RPE incentives in CEO contracts and whether the use of RPE is increasing over time, particularly in years when company performance is depressed. We also compare the characteristics of companies using RPE incentives to those of companies not using RPE, and we collect data on the performance measures, peer groups, time horizons, and payment methods for RPE incentives provided.
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Lechermann, Angela M., "Relative Performance Evaluation Incentives in CEO Compensation Contracts" (2015). Stander Symposium Posters. 602.
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