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

    Research output: Contribution to journalArticlepeer-review

    Abstract

    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
    Volume25
    Issue number9
    DOIs
    StatePublished - 1999

    Keywords

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

    Fingerprint

    Dive into the research topics of 'Relative performance evaluation in CEO pay contracts: Evidence from the commercial banking industry'. Together they form a unique fingerprint.

    Cite this