Search results
1 – 10 of 63Relative performance evaluation (RPE) is a widely studied topic in the theoretical and analytical accounting and economics literatures. The empirical literature also addresses…
Abstract
Purpose
Relative performance evaluation (RPE) is a widely studied topic in the theoretical and analytical accounting and economics literatures. The empirical literature also addresses this topic, with its main focus on executive compensation. This paper aims to extend the findings of the literature by assessing the extent to which RPE is used at lower organisational levels.
Design/methodology/approach
This study uses a purpose-developed survey to gather data from 325 business unit managers.
Findings
This study finds that RPE is used to a great extent in the performance evaluation of business unit managers. Additionally, the findings suggest that RPE use increases the informativeness of the performance evaluation through noise reduction. Noise in the performance evaluation is described in literature as the primary antecedent of RPE, but prior research provides only weak empirical support for this claim.
Research limitations/implications
This study hypothesises a causal relation between RPE and noise in performance evaluation. However, the use of cross-sectional survey data only allows testing associations, not causations.
Originality/value
The originality and value of the paper lie in the focus on the business unit level and the use of survey data, which are almost completely absent in this area of research that almost exclusively uses archival data at the executive level.
Details
Keywords
Fang Hu and Yahua Zhang
This paper investigates CEO turnover and the usefulness of relative performance evaluation (RPE) as a management incentive in an emerging economy lacking market-based competition.
Abstract
Purpose
This paper investigates CEO turnover and the usefulness of relative performance evaluation (RPE) as a management incentive in an emerging economy lacking market-based competition.
Methodology/approach
In a sample of China’s listed state-owned enterprises (SOEs) from the period 2001 to 2005, we manually collect the data where a CEO has gone after being removed by reading the annual reports of the firms and searching the major news and business publications, and run OLS regressions to examine how various incentives provided by different CEO turnovers such as promotion, demotion, and rotation affect the firm performance.
Findings
We find that 41% of departing CEOs in SOEs is being promoted. The promotion is positively associated with preceding firm performance relative to peers in the same region and this association is more significant than that between the promotion and firm’s specific performance. Furthermore, the promotion outperforms other incentive schemes such as CEO demotions by 5–8% in terms of subsequent Tobin’s q in three years. These consequences persist in undeveloped regions where there are fewer firms listed on the stock market, a lower stock market capitalization, or a higher regional Herfindahl–Hirschman Index (
Research implications
The findings imply that promotion based on RPE provides an important incentive by creating competitions.
Details
Keywords
John S. Howe and Scott O’Brien
We examine the use of relative performance evaluation (RPE), asymmetry in pay for skill/luck, and compensation benchmarking for a sample of firms involved in a spinoff. The…
Abstract
We examine the use of relative performance evaluation (RPE), asymmetry in pay for skill/luck, and compensation benchmarking for a sample of firms involved in a spinoff. The spinoff affects firm characteristics that influence the use of the identified compensation practices. We test for differences in the compensation practices for the pre- and post-spinoff firms. We find that RPE is used for post-spinoff CEOs, but not pre-spinoff CEOs. Post-spinoff CEOs are also paid asymmetrically for luck where they are rewarded for good luck but not punished for bad luck. Both pre- and post-spinoff CEOs receive similar levels of compensation benchmarking. The study provides additional evidence on factors that influence compensation practices. Our spinoff sample allows us to examine how compensation practices are affected by changes in firm characteristics while keeping other determinants of compensation constant (i.e., the board and, in many cases, the CEO). Our findings contribute to the understanding of how the identified compensation practices are used.
Details
Keywords
Reviews previous research on the effects of CEO compensation structure, outlines the criteria for relative performance evaluation (RPE) and notes the paucity of empirical evidence…
Abstract
Reviews previous research on the effects of CEO compensation structure, outlines the criteria for relative performance evaluation (RPE) and notes the paucity of empirical evidence to support it. Reports a study of the use of RPE for US bank CEO compensation 1976‐1988; and its relationship to shareholder, market and industry returns. Explains the methodology and presents the results, which suggest that CEO pay is positively linked to firm performance, but negatively linked to market/industry performance; and that performance is positively linked to CEO option wealth. Adds that both the pay/performance link and the use of RPE increased after bank deregulation in the early 1980s. Considers consistency with other research and concludes that the reduction in compensation risk offered by RPE should reduce compensation cost and thus provide a good reason for the banking industry to increase its use.
Details
Keywords
James J. Cordeiro, Rong Yang, D. Donald Kent Jr and Charles Callahan III
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…
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.
Details
Keywords
Shantanu Shantaram Apte, Abhijit Vasant Chirputkar and Abhijeet Lele
Relative performance evaluation (RPE) is a widely practiced employee appraisal process in the services industry. In a global delivery model, teams are spread across different…
Abstract
Purpose
Relative performance evaluation (RPE) is a widely practiced employee appraisal process in the services industry. In a global delivery model, teams are spread across different geographical locations. The team members work on various tasks under the guidance of different managers and at times under more than one manager for performing the same task. Such complexities make RPE of the team members quite challenging. The paper proposes a methodical step-by-step approach to simplify the evaluation process without compromising on the rigour.
Design/methodology/approach
RPE has followed three different approaches. First is the traditional way, wherein evaluators had a common meeting to discuss and arrive at relative evaluation and ranking of members of the peer group employees. In the second, the number of evaluators and employees in a peer group were split in to 2 subgroups. The evaluators provided independent ratings and rankings. Simple mathematical tool then derived the combined ranking. In the third approach, each evaluator evaluated each employee in the peer group and provided the relative ranking for each employee. Again, mathematical tools provided the final ranking considering inputs from all evaluators. All the three evaluation approaches were analysed through an inter-rater agreement method.
Findings
All the three approaches for evaluation provided similar results giving confidence that less time-consuming methods could be adopted by evaluators without compromising on the rigour of the evaluation. The outcome of the exercise proved effective as the complaints reaching the ombudsmen reduced as compared to the earlier years. Considerable evaluation time was also saved. The study described in this paper is carried out in a non-unionized, Indian private sector services firm. Its effectiveness in other set ups is yet to be tested.
Research limitations/implications
The research is carried out in the Indian Engineering services firm operating in the Knowledge based sector. Though study results are encouraging, the adaptability of methodology across different sectors and geographies is yet to be tested. More broad based studies are needed to evaluate suitability across firms and regions.
Practical implications
Relative evaluation exercise is challenging for evaluators. Although openness in evaluation is desired, it also makes evaluators uncomfortable in appearing to be taking sides or being opposing a candidate's ranking. The proposed approach brings in anonymity to each evaluator without scarifying individual evaluation.
Social implications
The proposed methodology can be deployed across different services industries as the proposed methodology is business domain agnostic. It can be easily ported and tailored to align with an individual organization's evaluation philosophy. The suitability and effectiveness of the method can be studied under various types of firms like manufacturing, private, public, NGO, labour oriented, etc. As the proposed method reduces efforts, the stake holders can focus on understanding the relation between employee performance measurement, employee engagement, and long-term outcomes related to employee performance evaluation.
Originality/value
The proposed employee evaluation method leverages inter-rater reliability and agreement tool as a consensus approach to the relative performance ranking exercise. Such an approach to relative performance ranking is original as no prior studies with such an approach are found in the existing Literature.
Details
Keywords
Irina Barakova and Ajay Palvia
The paper aims to revisit the topic of relative performance evaluation (RPE) of top management using a large panel of community banks.
Abstract
Purpose
The paper aims to revisit the topic of relative performance evaluation (RPE) of top management using a large panel of community banks.
Design/methodology/approach
The empirical tests for RPE utilized a two‐stage approach in a unique dataset of community banks executive turnover over a ten‐year period. This allowed the authors to better estimate the benchmark performance relative to which bank executives should be evaluated under RPE. Moreover, bank regulatory evaluations allowed the authors to control for the impact of poor governance.
Findings
The paper shows that penalizing executives for poor performance arising from economic downturns is not necessarily inconsistent with the theory. The empirical results indicate that weak downturn‐linked performance is strongly related to increased executive turnover. Furthermore, this relationship is more pronounced in better‐governed banks, which are more likely to engage in value‐enhancing disciplinary actions.
Research limitations/implications
The analysis suggests that executive dismissals during adverse economic conditions are not necessarily a result of bad luck; rather, the analysis implies that bad times are informative about management quality.
Practical implications
The main practical implication is that both relative and absolute performance should be incorporated in the incentive structure of bank executives.
Originality/value
The paper shows that the assumptions used in prior RPE studies may not be applicable to top executives which could explain the inconsistency between the theory and the empirical evidence. Further, the finding that better governed firms are more likely to penalize management for bad exogenously driven performance is unique and strengthens the case that disciplinary actions amid adverse economic times may not be due to bad luck.
Details
Keywords
Qian Hao, Nan Hu, Ling Liu and Lee J. Yao
– The purpose of this paper is to explore how networks of boards of directors affect relative performance evaluation (RPE) in chief executive officer (CEO) compensation.
Abstract
Purpose
The purpose of this paper is to explore how networks of boards of directors affect relative performance evaluation (RPE) in chief executive officer (CEO) compensation.
Design/methodology/approach
In this study, the authors propose that an interlocking network is an important inter-corporate setting, which has a bearing on whether boards decide to use RPE in CEO compensation. They adopt four typical graph measures to depict the centrality/position of each board in the interlock network: degree, betweenness, eigenvector and closeness, and study their impacts on RPE use.
Findings
The authors find that firms that have more connected board members and whose board members are connected to better connected firms are more likely to reward their CEOs contingent on their peers’ performance, indicating that information transmission along the board interlock network facilitates the adoption of RPE. This result is robust to alternative measures for board interlock networks and various types of CEO compensation. It highlights the role of interlocking directorates in disseminating information and practice of RPE use along board network.
Originality/value
The authors use social network analysis to measure the relationships and flows between the connected nodes and study the impact on executive compensation design.
Details
Keywords
Jianhui Huang, Ling Liu and Ingrid C. Ulstad
– The purpose of this study is to investigate the cross-sectional associations between growth options and the peer pay–performance sensitivity of CEO compensation.
Abstract
Purpose
The purpose of this study is to investigate the cross-sectional associations between growth options and the peer pay–performance sensitivity of CEO compensation.
Design/methodology/approach
This study includes analytical analysis and multivariable regression analysis.
Findings
It is predicted in this study that there is a non-linear concave relation between peer pay–performance sensitivity and a firm’s growth options. Results based on the executive compensation data from ExecuComp are consistent with the hypothesis presented in this study.
Research limitations/implications
Future scholars need to consider the non-linear impact of growth options on peer pay–performance sensitivity when they conduct research related to CEO compensation by differentiating the company’s growth options to be at a low, medium and high level. In an industry, when a compensation committee decides on the peers for performance comparison purposes, the committee needs to make sure that the peer firms they select have similar operational environments, for example, they face similar growth options (e.g. low, medium or high) and idiosyncratic variances.
Practical implications
This study contributes to the managerial compensation literature by revealing the important role growth options, as well as idiosyncratic variances, play on peer pay–performance sensitivity. The results of this study have implications for both future researchers as well as industrial practitioners.
Social implications
It gives guidance on designing CEO compensation contracts.
Originality/value
This is an original work from the coauthors listed on this study.
Details
Keywords
Al Bento and Lourdes Ferreira White
Performance management involves budgeting, performance evaluation, and incentive compensation. This study describes a model that encompasses these three elements of performance…
Abstract
Performance management involves budgeting, performance evaluation, and incentive compensation. This study describes a model that encompasses these three elements of performance management. To illustrate the model, survey data were examined using path analysis. The empirical evidence supports the model, and suggests several intervening variables that mediate the direct and indirect effects of budgeting, performance evaluation, and incentives on gaming behaviors and individual performance.