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Explicit relative performance evaluation in performance-vested equity grants

Author

Listed:
  • Mary Ellen Carter

    (Boston College)

  • Christopher D. Ittner

    (University of Pennsylvania)

  • Sarah L. C. Zechman

    (University of Chicago)

Abstract

Using data from FTSE 350 firms, we examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide exploratory evidence on whether the use or characteristics of RPE are associated with efforts to improve incentives by removing common risk, other economic factors discussed in the RPE literature, or external pressure to implement RPE. We find that many of these economic factors, including common risk reduction, are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors or others is associated with plans with tougher overall RPE conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. Further, we find evidence that vesting percentages vary in RPE and non-RPE plans.

Suggested Citation

  • Mary Ellen Carter & Christopher D. Ittner & Sarah L. C. Zechman, 2009. "Explicit relative performance evaluation in performance-vested equity grants," Review of Accounting Studies, Springer, vol. 14(2), pages 269-306, September.
    • Handle: RePEc:spr:reaccs:v:14:y:2009:i:2:d:10.1007_s11142-009-9085-8
    DOI: 10.1007/s11142-009-9085-8
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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