Say on Pay Votes, Competition Type, and the Use of Relative Performance Evaluation in CEO Compensation

• In Event: Research Paper Session—Management Accounting

Abstract

Relative performance evaluation (RPE) is viewed as an efficient way to assess an agent’s actions since RPE uses peer performance to insulate the agent’s common risk (Holmstrom 1982). This study examines whether the implementation of the Say on Pay vote (hereafter the SOP vote) enhances the use of RPE in CEO compensation. The SOP vote is one striking provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (hereafter the Dodd-Frank Act) that requires corporate boards to submit their executive pay packages to mandatory but non-binding shareholders vote at least every three years. We predict and find an increased use of RPE in CEO total compensation and current compensation after the implementation of the SOP vote. We further examine the effect of competition type on the association between the SOP vote and the use of RPE in CEO compensation. Competition type is classified as price and non-price competition using the median value of the industry-level advertising expenses to sales ratio. Our results provide evidence on the increased use of RPE in the post-SOP-vote period for firms in price competitive environment but not for firms in non-competitive environment.

Authors

• Fangjun Sang, Kent State University - Kent

• Indrarini Laksmana, Kent State University - Kent