Relative performance evaluation in CEO pay contracts: Evidence from the commercial banking industry

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This paper examines the use of Relative Performance Evaluation in bank CEO pay contracts between 1976-1988. Relating CEO pay to raw firm performance creates compensation risk over that of fixed salary contracts. By evaluating firm performance relative to peer performance using Relative Performance Evaluation, (RPE), CEO compensation risk can be reduced. We find evidence that bank CEO compensation is adjusted for narrowly defined industry performance measures but not for broader market performance measures. This result is inconsistent with the previous literature that documents broad market-RPE but finds no significant relation between executive pay and industry-RPE. Consistent with the RPE hypothesis we find the use of RPE increased in the early 1980s as banks became less regulated and pay-performance relations increased. We find no evidence of the use of RPE prior to deregulation when we document no significant relation between CEO pay and bank performance. These results are consistent with the use of RPE to reduce compensation risk associated with higher pay-performance relations.

Original languageEnglish
Pages (from-to)34-54
Number of pages21
JournalManagerial Finance
Issue number9
StatePublished - 1999


  • Accounting research
  • Executives
  • High technology
  • Pay
  • R & D
  • USA


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