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CEO Power and Relative Performance Evaluation
Author(s) -
Dikolli Shane S.,
Diser Viktoria,
Hofmann Christian,
Pfeiffer Thomas
Publication year - 2017
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12316
Subject(s) - delegation , chief executive officer , executive compensation , compensation (psychology) , power (physics) , selection (genetic algorithm) , business , empirical research , accounting , econometrics , psychology , economics , computer science , social psychology , statistics , management , artificial intelligence , mathematics , physics , quantum mechanics
We model relative performance evaluation ( RPE ) when a Chief Executive Officer ( CEO ) has the power to opportunistically influence the design of RPE by choosing the weight on an index‐based peer group or by customizing the selection of peers comprising a peer group. A powerful CEO compares the benefits of reducing common risk affecting his compensation with the benefits of receiving a higher bonus by economizing on expected peer‐group performance. As a consequence, the Board of Directors (BoD) is less likely to use RPE . Our analytical model yields hypotheses predicting that powerful CEO s choose to reduce common risk only partially and that BoDs choose to not implement RPE if expected peer performance is sufficiently high. Our model has further empirical implications in (i) providing new interpretations of tests for detecting strong‐form and weak‐form RPE in the presence of powerful CEO s, and (ii) suggesting a new empirical measure of CEO power with a focus on the delegation of RPE decision rights.