Ceo Power And Relative Performance Evaluation
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Author | : Shane S. Dikolli |
Publisher | : |
Total Pages | : 43 |
Release | : 2016 |
Genre | : |
ISBN | : |
We model relative performance evaluation (RPE) when a Chief Executive Officer (CEO) has the power to opportunistically influence the design of RPE by choosing the weight on an index-based peer group or by customizing the selection of peers comprising a peer group. A powerful CEO compares the benefits of reducing common risk affecting his compensation with the benefits of receiving a higher bonus by economizing on expected peer-group performance. The Board of Directors (BoD) is less likely to use RPE if a powerful CEO can influence RPE design. Our analytical model yields hypotheses predicting that powerful CEOs choose to reduce common risk only partially and that BoDs choose to not implement RPE if expected peer performance is sufficiently high. Our model has further empirical implications in (1) providing new interpretations of tests for detecting strong-form and weak-form RPE in the presence of powerful CEOs, and (2) suggesting a new empirical measure of CEO power with a focus on the delegation of RPE decision rights.
Author | : Lin Ge |
Publisher | : |
Total Pages | : 44 |
Release | : 2018 |
Genre | : |
ISBN | : |
We study whether changes in corporate governance and CEO power affect bonus-based implicit relative performance evaluation (RPE). We rely on a regression discontinuity design of shareholder proposals to proxy for shocks to CEO power. The effect of shareholder proposals on RPE is stronger under situations where shareholder proposals are expected to better capture changes in CEO power. We identify important real effects associated with the strengthening of RPE and find that idiosyncratic risk increases and co-movement decreases between firms and their peers in terms of changes in capital and inventory investment and changes in Tobin's Q after a shareholder proposal is passed.
Author | : Robert Gibbons |
Publisher | : |
Total Pages | : 60 |
Release | : 1989 |
Genre | : Chief executive officers |
ISBN | : |
Measured individual performance often depends on random factors which also affect the performances of other workers in the same firm, industry, or market. In these cases, relative performance evaluation (RPE) can provide incentives while partially insulating workers from the common uncertainty. Basing pay on relative performance, however, generates incentives to sabotage the measured performance of co-workers, to collude with co-workers and shirk, and to apply for jobs with inept co-workers. RPE contracts also are less desirable when the output of co-workers is expensive to measure or in the presence of production externalities, as in the case of team production. The purpose of this paper is to review the benefits and costs of RPE and to test for the presence of RPE in one occupation where the benefits plausibly exceed the costs: chief executive officers (CEOs). In contrast to previous research, our empirical evidence strongly supports the RPE hypothesis-CEO pay revisions and retention probabilities are positively and significantly related to firm performance, but are negatively and significantly related to industry and market performance, ceteris paribus. Our results also suggest that CEO performance is more likely to be evaluated relative to aggregate market movements than relative to industry movements.
Author | : David De Angelis |
Publisher | : |
Total Pages | : 43 |
Release | : 2019 |
Genre | : |
ISBN | : |
Relative performance evaluation (RPE) in 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.
Author | : Kevin J. Murphy |
Publisher | : |
Total Pages | : |
Release | : 1991 |
Genre | : |
ISBN | : |
Measured individual performance often depends on random factors which also affect the performances of other workers in the same firm, industry, or market. In these cases, relative performance evaluation (RPE) can provide incentives while partially insulating workers from the common uncertainty. Basing pay on relative performance, however, generates incentives to sabotage the measured performance of co-workers, to collude with co-workers and shirk, and to apply for jobs with inept co-workers. RPE contracts also are less desirable when the output of co-workers is expensive to measure or in the presence of production externalities, as in the case of team production. The purpose of this paper is to review the benefits and costs of RPE and to test for the presence of RPE in one occupation where the benefits plausibly exceed the costs: chief executive officers (CEOs). In contrast to previous research, our empirical evidence strongly supports the RPE hypothesis-CEO pay revisions and retention probabilities are positively and significantly related to firm performance, but are negatively and significantly related to industry and market performance, ceteris paribus. Our results also suggest that CEO performance is more likely to be evaluated relative to aggregate market movements than relative to industry movements.
Author | : Dirk Jenter |
Publisher | : |
Total Pages | : 34 |
Release | : 2014 |
Genre | : |
ISBN | : |
This paper shows that CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks from firm performance before deciding on CEO retention. Using a hand-collected sample of 3,365 CEO turnovers from 1993 to 2009, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and, to a lesser extent, after bad market performance. A decline in industry performance from the 90th to the 10th percentile doubles the probability of a forced CEO turnover.
Author | : Robert Gibbons |
Publisher | : |
Total Pages | : 38 |
Release | : 1989 |
Genre | : |
ISBN | : |
Author | : |
Publisher | : |
Total Pages | : 38 |
Release | : 1989 |
Genre | : |
ISBN | : |
Author | : C. Edward Fee |
Publisher | : |
Total Pages | : 46 |
Release | : 2017 |
Genre | : |
ISBN | : |
We examine the robustness of empirical models and findings concerning CEO turnover. We show that the sensitivity of turnover to abnormal firm performance is an extremely robust result. In contrast, evidence indicating a relation between turnover and industry performance is both weak and fragile. We show that small changes in turnover modeling choices can affect inferences in a large way. Our evidence casts substantial doubt on the hypothesis that there is a large industry performance component to turnover decisions. We use our findings to offer some general prescriptions for checking robustness results in CEO turnover research.
Author | : Paul L. Joskow |
Publisher | : |
Total Pages | : 56 |
Release | : 1994 |
Genre | : Chief executive officers |
ISBN | : |
This study explores the dynamic structure of the pay-for- performance relationship in CEO compensation and quantifies the effect of introducing a more complex model of firm financial performance on the estimated performance sensitivity of executive pay. The results suggest that current compensation responds to past performance outcomes, but that the effect decays considerably within two years. This contrasts sharply with models of infinitely persistent performance effects implicitly assumed in much of the empirical compensation literature. We find that both accounting and market performance measures influence compensation and that the salary and bonus component of pay as well as total compensation have become more sensitive to firm financial performance over the past two decades. There is no evidence that boards fail to penalize CEOs for poor financial performance or reward them disproportionately well for good performance. Finally, the data suggest that boards may discount extreme performance outcomes -both high and low - relative to performance that lies within some `normal' band in setting compensation.