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Relative performance evaluation for chief executive officers

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  • Robert Gibbons
  • Kevin J. Murphy

Abstract

Relative performance evaluation (RPE) provides employees with an incentive to perform well while insulating their compensation from shocks that also affect the performances of other workers in the same firm, industry, or market. This paper reviews the benefits and costs of RPE and tests for the presence of RPE in the compensation contracts of chief executive officers (CEOs) using data on 1,668 CEOs from 1,049 corporations from 1974 to 1986. The results, in contrast to the findings of previous research, strongly support the hypothesis that RPE is used in compensation and retention decisions affecting CEOs: the revision in a CEO's pay and the probability that a CEO remains in his position for the following year are positively and significantly related to firm performance, but are negatively and significantly related to industry and market performance. (Abstract courtesy JSTOR.)

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Bibliographic Info

Article provided by ILR Review, Cornell University, ILR School in its journal ILR Review.

Volume (Year): 43 (1990)
Issue (Month): 3 (February)
Pages: 30-51

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Handle: RePEc:ilr:articl:v:43:y:1990:i:3:p:30-51

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  1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  2. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  3. Wolfson, Mark A, 1985. "Tax, Incentive, and Risk-sharing Issues in the Allocation of Property Rights: The Generalized Lease-or-Buy Problem," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 58(2), pages 159-71, April.
  4. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1989. "Alternative Mechanisms for Corporate Control," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 842-52, September.
  5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 225-64, April.
  6. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 561-80, June.
  7. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 7(1-3), pages 11-42, April.
  8. Carmichael, H Lorne, 1988. "Incentives in Academics: Why Is There Tenure?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(3), pages 453-72, June.
  9. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 431-460, January.
  10. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  11. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 841-64, October.
  12. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  13. Dye, Ronald A, 1984. "The Trouble with Tournaments," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 22(1), pages 147-49, January.
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