Aggregate CEO Compensation, Aggregate Performance and Aggregate Relative Performance Evaluation

• In Event: Relative Performance Evaluation

Abstract

We document the effect of two types of aggregation – time-series and cross-sectional – on the relation between executive compensation and two common performance measures: stock market returns and accounting earnings. We find that time-series aggregation for each firm over two and four years strengthens the pay-performance relation relative to that obtained using firm-year observations. These findings are consistent with reduced measurement error from noise in the performance measures or inter-temporal misalignment. In the cross-sectional aggregation, the pay-performance relation is stronger than that documented at the firm-level in prior research but may be affected by implicit relative performance evaluation. When we compare industry-year to industry-pseudo-year cross-sectional aggregation, we find evidence consistent with RPE being use and elimination of noise in the estimation of pay-for-performance sensitivity.

Authors

• Ana Maria Albuquerque, Boston University

• Mary Ellen Carter, Boston College

• Bjorn N Jorgensen, london school of economics and political science