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

Published online by Cambridge University Press:  06 August 2019

David De Angelis*
Affiliation:
De Angelis, [email protected], Rice University Jones Graduate School of Business
Yaniv Grinstein
Affiliation:
Grinstein, [email protected], Interdisciplinary Center (IDC) Herzliya, Arison School of Business and Cornell University Johnson School of Management
*
De Angelis (corresponding author), [email protected]

Abstract

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.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

Earlier versions of this paper were circulated as “Relative Performance Evaluation in CEO Compensation: A Non-Agency Explanation” and as “How is Relative Performance Evaluation Incorporated in CEO Compensation Contracts?” We thank David Aboody, Tania Babina, Kerry Back, Alex Butler, Jeffrey Coles (the referee), Alan Crane, Kevin Crotty, Andrew Ellul (discussant), Michael Faulkender (discussant), Gustavo Grullon, Jarrad Harford (the editor), Thomas Hemmer, Ronen Israel, Doron Israeli (discussant), George Kanatas, Ron Kaniel, Ernst Maug, Roni Michaely, Sébastien Michenaud, Kevin Murphy, Francisco Urzua Infante (discussant), and James Weston for helpful discussions, and seminar participants at University of Amsterdam, University of Illinois, University of Mannheim, Rice University, the 2013 Bar Ilan University Ackerman conference on executive compensation, the 2014 HKBU International Corporate Governance Conference, the 2014 Economic Workshop at IDC Herzliya, the 2014 Summer Finance Conference at IDC Herzliya, the 2015 Annual Meeting of the American Finance Association, and the 2016 Workshop on Executive Compensation and Corporate Governance at the Erasmus University Rotterdam for helpful comments and suggestions. We are grateful to Yamil Kaba and Sophia Shao for their research assistance. All remaining errors are our own.

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