Journal of Financial and Quantitative Analysis Vol. 55 No. 7 2020
Relative Performance Evaluation in CEO Compensation: A Talent-Retention Explanation
Abstract
Relative performance evaluation (RPE) in chief executive officer (CEO) compensation can be used as a commitment device to pay CEOs for their revealed relative talent. We find evidence consistent with the talent-retention hypothesis, using two different approaches. First, we examine the RPE terms in compensation contracts and document features that are consistent with retention motives. Second, using a novel empirical specification for detecting RPE, we find RPE is less prevalent when CEO talent is less transferrable: Among specialist CEOs, founder CEOs, and retirement-age CEOs, as well as in industries and states where the market for CEO talent is more restrictive.
- DOI
- 10.1017/s0022109019000504
- Volume
- 55
- Issue
- 7
- Pages
- 2099-2123
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref