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What form of relative performance evaluation?

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Author Info

  • Marco Celentani
  • Rosa Loveira-Pazó

Abstract

We study relative performance evaluation in executive compensation when executives have private information about their ability. We assume that the joint distribution of an individual firm’s profit and market movements depends on the ability of the executive that runs the firm. In the equilibrium of the executive labor market, compensation schemes exploit this fact to sort executives of di ?erent abilities. This implies that executive compensation is increasing in own performance, but may also be increasing in industry performance-a sharp departure from standard relative performance evaluation. This result provides an explanation for the scarcity of relative performance considerations in executive compensation documented by the empirical literature.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 744.

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Date of creation: Jan 2004
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Handle: RePEc:upf:upfgen:744

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Executive compensation; relative performance evaluation;

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References

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  1. Barro, Jason R. & Barro, Robert J., 1990. "Pay, Performance, and Turnover of Bank CEOs," Scholarly Articles 3451300, Harvard University Department of Economics.
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  12. Hellwig,Martin, 1986. "Some recent developments in the theory of competition in markets with adverse selection," Discussion Paper Serie A 82, University of Bonn, Germany.
  13. John M. Abowd & David S. Kaplan, 1999. "Executive Compensation: Six Questions That Need Answering," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 145-168, Fall.
  14. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  15. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
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  18. Robert Gibbons & Kevin J. Murphy, 1990. "Relative performance evaluation for chief executive officers," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 30-51, February.
  19. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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  24. repec:rus:hseeco:16303 is not listed on IDEAS
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Citations

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Cited by:
  1. Marco Celentani & Rosa Loveira, 2006. "A Simple Explanation of the Relative Performance Evaluation Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 525-540, July.
  2. Michael Magill & Martine Quinzii, 2006. "Common Shocks and Relative Compensation," Annals of Finance, Springer, vol. 2(4), pages 407-420, October.
  3. Marcello D'Amato & Riccardo Martina & Salvatore Piccolo, 2005. "Endogenous Managerial Contract," CSEF Working Papers 148, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2006.
  4. Celentani, Marco & Loveira, Rosa, 2006. "A simple explanation of the relative performance evaluation puzzle," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4824, Universidad Carlos III de Madrid.

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