Contemporary Accounting Research Vol. 35 No. 3 2018
CEO Power and Relative Performance Evaluation
Abstract
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. As a consequence, the Board of Directors (BoD) is less likely to use RPE . Our analytical model yields hypotheses predicting that powerful CEO s 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 (i) providing new interpretations of tests for detecting strong‐form and weak‐form RPE in the presence of powerful CEO s, and (ii) suggesting a new empirical measure of CEO power with a focus on the delegation of RPE decision rights.
- DOI
- 10.1111/1911-3846.12316
- Volume
- 35
- Issue
- 3
- Pages
- 1279-1296
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex