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The role of operating efficiency and asset productivity in relative performance evaluation and CEO compensation in Indian firms

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  • Sudhir Kumar Jaiswal

    (Indian Institute of Management Calcutta)

  • Asish Kumar Bhattacharyya

    (Indian Institute of Corporate Affairs)

Abstract

The use of relative performance evaluation (RPE) to determine compensation improves contracting efficiency, reduces moral hazard, and provides effort incentive. This study investigates how RPE usage in CEO compensation in Indian private sector firms is associated with a firm’s operating efficiency and asset productivity. It documents that firms with lower operating efficiency and asset productivity use more RPE by placing a more negative weight on their peer’s performance. Further, this study documents that more RPE usage is associated with lower asset productivity in both business group-affiliated firms as well as independent firms. In contrast, more RPE usage is associated with lower operating efficiency only in independent firms. This indicates that a firm’s ownership structure too plays a role in the RPE usage in Indian private sector firms.

Suggested Citation

  • Sudhir Kumar Jaiswal & Asish Kumar Bhattacharyya, 2016. "The role of operating efficiency and asset productivity in relative performance evaluation and CEO compensation in Indian firms," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 43(3), pages 201-221, September.
    • Handle: RePEc:spr:decisn:v:43:y:2016:i:3:d:10.1007_s40622-016-0128-2
    DOI: 10.1007/s40622-016-0128-2
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