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

Author

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  • Dragan Ilić

    (ETH Zurich, CER Center of Economic Research
    University of Basel, Faculty of Business and Economics)

  • Sonja Pisarov

    (University of Zurich)

  • Peter S. Schmidt

    (University of Geneva, the Geneva Finance Research Institute)

Abstract

The rise in the level of executive compensation in international banking in the last two decades has been striking. At the same time, corporate declarations of relative performance evaluation (RPE) have enjoyed widespread popularity. RPE determines the level of CEO pay by accounting for common market shocks that are out of a CEO’s control, providing better governance and incentivizing CEOs to maximize shareholder value. In this paper, we test for evidence of RPE in international banking and pay particular attention to banks that openly disclose its use. To that end, we collect compensation data on 46 large international banks. Taken as a whole, our sample shows moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of RPE-disclosing banks. These results hold up to a series of robustness checks. In addition, we find that the use of RPE is positively related to firm size and negatively related to growth options.

Suggested Citation

  • Dragan Ilić & Sonja Pisarov & Peter S. Schmidt, 2019. "Preaching water but drinking wine? Relative performance evaluation in international banking," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-25, December.
    • Handle: RePEc:spr:sjecst:v:155:y:2019:i:1:d:10.1186_s41937-019-0032-8
    DOI: 10.1186/s41937-019-0032-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Relative performance evaluation; Executive compensation; Peer group; Banks; Disclosure;
    All these keywords.

    JEL classification:

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

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