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What determines the variation in relative performance evaluation usage across US industries?

James J. Cordeiro (School of Business Administration and Economics, College at Brockport, State University of New York, Brockport, New York, USA)
Rong Yang (Saunders College of Business, Rochester Institute of Technology, Rochester, New York, USA)
D. Donald Kent Jr (School of Business Administration and Economics, College at Brockport, State University of New York, Brockport, New York, USA)
Charles Callahan III (School of Business Administration and Economics, College at Brockport, State University of New York, Brockport, New York, USA)

Management Research Review

ISSN: 2040-8269

Article publication date: 13 May 2014

462

Abstract

Purpose

Relative performance evaluation (RPE) involves board comparisons of firm performance to that of a peer group when evaluating CEO performance. To date, research on RPE in the USA has typically relied on models where RPE is implicitly assumed. In contrast, Bannister and Newman provide some direct evidence on the explicit RPE usage by US firms showing that it is limited and there is significant inter-industry variation in its use. The authors aim to focus on why boards in some industries employ RPE to a greater extent than those in other industries do using measures of industry discretion, industry homogeneity, industry competition.

Design/methodology/approach

The authors utilize the sample use in the Bannister and Newman study of RPE usage in industries (160 firms from the 1992 Fortune 250 with proxy statements for 1992 and 1993). The authors compile measures of industry membership (using SIC codes), industry discretion, industry homogeneity, and industry competition from Compustat a well. Multiple regression is used to test the hypotheses.

Findings

The authors find that the use of RPE at the industry level is significantly related to industry discretion (i.e. the degree of latitude that managers have over strategic and operational choices in the particular industry environment) and industry homogeneity, but not to industry competition.

Research limitations/implications

The study is limited in terms of a dated sample (necessary to be consistent with the Bannister and Newman paper). It would bear updating. In addition, multi-year panel data could be used to generate more robust results. It would also be useful to replicate the study in other national (and hence governance) contexts.

Practical implications

The findings should help boards when deciding how to reward or punish CEOs and top managers for their firm performance by filtering out relative performance in a more rational manner (e.g. by taking relevant industry context into account).

Originality/value

In terms of originality, this is the first study, to the authors' knowledge, that investigates RPE at the industry level. It is valuable because industry discretion is an important contextual variable that a board of directors will find useful in evaluating managers since this type of discretion is beyond managerial control.

Keywords

Citation

J. Cordeiro, J., Yang, R., Donald Kent Jr, D. and Callahan III, C. (2014), "What determines the variation in relative performance evaluation usage across US industries?", Management Research Review, Vol. 37 No. 5, pp. 502-514. https://doi.org/10.1108/MRR-07-2013-0175

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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