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What form of relative performance evaluation?;
A Simple Explanation of the Relative Performance Evaluation Puzzle
Celentani, Marco; Loveira-Pazó, Rosa
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We study relative performance evaluation in executive compensation whenexecutives have private information about their ability. We assume that thejoint distribution of an individual firm s profit and market movements dependson the ability of the executive that runs the firm. In the equilibrium of theexecutive labor market, compensation schemes exploit this fact to sortexecutives of di ?erent abilities. This implies that executive compensation isincreasing in own performance, but may also be increasing in industryperformance-a sharp departure from standard relative performance evaluation.This result provides an explanation for the scarcity of relative performanceconsiderations in executive compensation documented by the empirical literature.
15-09-2005
Business Economics and Industrial Organization
Microeconomics
executive compensation
relative performance evaluation
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