Relative performance evaluation: implications for policy, practice and research

This dissertation examines how the use of relative performance evaluation in compensation contracts of managers of large firms affects decisions of those managers. For an increasing number of managers, their compensation contract is defined relative to performance of other firms: in 2006, only 20 percent of firms provide managers with an explicit incentive to outperform peer firms, whereas nowadays, this statistic exceeds 50 percent. With regard to managerial decision-making, three broad categories of decisions in three distinct studies are considered: (1) risk-taking; (2) competitive aggressiveness; and (3) information disclosure. Each study outlines and tests economic forces that affect these decisions. Collectively, the three studies conclude that relative performance evaluation has crucial implications for managerial decisions, but also conclude that there is no “one effect” on managerial decision making. The dissertation therefore contributes to and has implications for policy, practice and research.