CEO Power and Relative Performance Evaluation

Author(s)

Shane S. Dikolli, Viktoria Diser, Christian Hofmann, Thomas Pfeiffer

Abstract

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 CEOs 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 CEOs, and (ii) suggesting a new empirical measure of CEO power with a focus on the delegation of RPE decision rights.

Organisation(s)

Department of Accounting, Innovation and Strategy

External organisation(s)

Ludwig-Maximilians-Universität München, Duke University

Journal

Contemporary Accounting Research

Volume

35

Pages

1279-1296

No. of pages

18

DOI

https://doi.org/10.1111/1911-3846.12316

Publication date

05-2017

Peer reviewed

Yes

Austrian Fields of Science 2012

502006 Controlling

Keywords

ASJC Scopus subject areas

Economics and Econometrics, Accounting, Finance

Portal url

https://ucris.univie.ac.at/portal/en/publications/ceo-power-and-relative-performance-evaluation(b8e4b441-cb45-4475-99d2-9f804eb2b6d4).html