Harry Newman studies the choice of whether to use relative performance evaluation in executive compensation plans

Harry Newman’s co-authored article “Explaining the choice of whether to use relative performance evaluation in executive compensation plans” was published in 2018  in Advances in Quantitative Analysis of Finance and Accounting. Agency theory provides a clear rationale for why CEOs should be at least partially compensated on the basis of firm performance relative to the performance of other firms (i.e., relative performance evaluation or RPE). The authors test whether differences in hypothesized RPE-related costs and benefits influence the likelihood that firms employ RPE. They find RPE is more likely to be used (1) when the firm’s stock “beta” (measured relative to its industry’s return rather than market return) is high, (2) in competitive industries, and (3) and when industry sales growth is low. Their findings are consistent with firms considering RPE-related costs and benefits when deciding whether to employ RPE. Furthermore, their finding that RPE is used in competitive industries and is found among industries experiencing low sales growth suggest that strategic interactions in the product market are not significant in the decision of whether to employ RPE.