Seminar Date: 26 September, 2014 (Friday)

Seminar Time: 10:30 a.m. - 12:00 p.m.

Seminar Venue: Room 405, 4F, Building 1, College of Management

Speaker: Prof. Stephanie Tsui

Title: Relative Performance Evaluation and the Use of Discretionary Bonuses in Executive Compensation

 

Abstract:

In this study, I examine the extent to which firms rely on relative performance evaluation (RPE) when setting executive compensation. In particular, I examine whether firms use information about peer performance to determine compensation at the end of the performance period, i.e. after both firm and peer performance are observed. I find that the use of relative performance evaluation is most pronounced for firms that allow little or no scope for ex post discretionary adjustments to annual bonuses. Conversely, firms grant mainly discretionary bonuses exhibit little use of relative performance evaluation. These findings suggest that information about peer performance is not used at the end of the year. Instead, peer performance seems to be incorporated in performance targets at the beginning of the year, at least among firms primarily using objective performance targets. In addition, I provide new evidence on the determinants of the use of subjectivity in annual bonus plans.