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

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  • De Angelis, David
  • Grinstein, Yaniv

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.

Suggested Citation

  • De Angelis, David & Grinstein, Yaniv, 2020. "Relative Performance Evaluation in CEO Compensation: A Talent-Retention Explanation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(7), pages 2099-2123, November.
    • Handle: RePEc:cup:jfinqa:v:55:y:2020:i:7:p:2099-2123_1
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    Cited by:

    1. Dunhong Jin & Thomas Noe, 2022. "The Golden Mean: The Risk‐Mitigating Effect of Combining Tournament Rewards with High‐Powered Incentives," Journal of Finance, American Finance Association, vol. 77(5), pages 2907-2947, October.
    2. Zhang, Zhe & Zhang, Linlang & Chan, Kam C., 2022. "Can a decentralized power structure affect executive compensation? Evidence from Chinese business groups," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    3. Do, Truc & Zhang, Huai & Zuo, Luo, 2022. "Rocking the boat: How relative performance evaluation affects corporate risk taking," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    4. Grinstein, Yaniv & Lauterbach, Beni & Yosef, Revital, 2022. "Benchmarking of pay components in CEO compensation design," Journal of Corporate Finance, Elsevier, vol. 77(C).
    5. Bloomfield, Matthew J. & Heinle, Mirko & Timmermans, Oscar, 2024. "Relative performance evaluation and strategic peer-harming disclosures," LSE Research Online Documents on Economics 122509, London School of Economics and Political Science, LSE Library.
    6. Choi, Yoon K. & Han, Seung Hun & Kwon, Yonghyun, 2024. "Relative performance evaluation with business group affiliation as a source of common risk," Global Finance Journal, Elsevier, vol. 60(C).
    7. Christoph Feichter & Frank Moers & Oscar Timmermans, 2022. "Relative Performance Evaluation and Competitive Aggressiveness," Journal of Accounting Research, Wiley Blackwell, vol. 60(5), pages 1859-1913, December.
    8. Timmermans, Oscar, 2024. "Cash versus share payouts in relative performance plans," LSE Research Online Documents on Economics 123696, London School of Economics and Political Science, LSE Library.

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