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Preaching water but drinking wine? Relative performance evaluation in international banking

Author

Listed:
  • Dragan Ilić
  • Sonja Pisarov
  • Peter S. Schmidt

Abstract

Relative performance evaluation (RPE) is, at least on paper, enjoying widespread popularity in determining the level of executive compensation. Yet existing empirical evidence of RPE is decidedly mixed. Two principal explanations are held responsible for this discord. A constructional challenge arises from intricacies of identifying the correct peers. And on a simpler note, corporate commitments to RPE could be mere exercises in empty rhetoric. We address both issues and test the use of RPE in a new sample of large international non-U.S. banks. Taken as a whole, the banks in our sample show moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of banks that disclose the use of peers in their compensation schemes. This finding lends support to the credibility and thus informational value of RPE commitments. Digging deeper, we conclude that RPE usage is driven by firm size and growth options.

Suggested Citation

  • Dragan Ilić & Sonja Pisarov & Peter S. Schmidt, 2015. "Preaching water but drinking wine? Relative performance evaluation in international banking," ECON - Working Papers 208, Department of Economics - University of Zurich, revised Aug 2016.
    • Handle: RePEc:zur:econwp:208
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    File URL: https://www.zora.uzh.ch/id/eprint/114281/7/econwp208.pdf
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    More about this item

    Keywords

    Relative performance evaluation; executive compensation; peers; banks; disclosure;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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