| This thesis consists of three essays in Relative Performance Evaluation (RPE) in the context of CEO compensation. The use of RPE in CEO compensation provides insurance against external shocks and permits a better evaluation of CEO actions by the board. In spite of the theoretical arguments supporting RPE, the empirical evidence on the use of RPE in CEO compensation is mixed.; Chapter 1 claims that previous studies have failed to detect RPE usage in implicit CEO compensation contracts because they have not used the relevant peer group. An RPE peer is a firm that faces not only the same type of external shocks, but also similar costs in responding to shocks. I argue that within an industry, firms of different sizes likely have different peers. External shocks and flexibility in responding to the shocks are a function of, for example, a firm's technology, the complexity of the organization, and the ability to access external credit, which depend on firm size. Hence, looking at the performance of firms of similar size within an industry is more informative about external shocks and the costs of responding to shocks. Using as peers firms in the same industry-size group, I find evidence supporting the use of RPE in CEO compensation.; Chapter 2 argues that the use of relative performance evaluation (RPE) as an incentive mechanism varies inversely with a firm's level of growth options: (i) for firms with high levels of growth options, peer performance is a less informative measure of external shocks outside of the CEO's control, and (ii) RPE implementation costs are higher for high growth options firms. The evidence supports these hypotheses.; Chapter 3 shows how executive compensation contracts that account for relative performance must be adjusted for cost heterogeneity among firms. I investigate this effect in a strategic product market environment in which firms compete using Bertrand or Cournot strategies. Both models predict that, depending on cost heterogeneity, shareholders of significantly more efficient firms deviate from the compensation package given by the least efficient firm. |
