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Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence

Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and... ABSTRACT We examine compensation contracts for managers in imperfectly competitive product markets. We show that strategic interactions among firms can explain the lack of relative performance‐based incentives in which compensation decreases with rival firm performance. The need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance. Firms in more competitive industries place greater weight on rival firm performance relative to own firm performance. We find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence

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References (59)

Publisher
Wiley
Copyright
© American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/0022-1082.00180
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT We examine compensation contracts for managers in imperfectly competitive product markets. We show that strategic interactions among firms can explain the lack of relative performance‐based incentives in which compensation decreases with rival firm performance. The need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance. Firms in more competitive industries place greater weight on rival firm performance relative to own firm performance. We find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry.

Journal

The Journal of FinanceWiley

Published: Dec 1, 1999

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