Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence |
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Authors: | Rajesh K Aggarwal & Andrew A Samwick |
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Institution: | Amos Tuck School of Business Administration, Dartmouth College,;Department of Economics, Dartmouth College, and NBER |
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Abstract: | We examine compensation contracts for managers in imperfectly competitive product markets. We show that strategic interactions among firms can explain the lack of relative performance-based incentives in which compensation decreases with rival firm performance. The need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance. Firms in more competitive industries place greater weight on rival firm performance relative to own firm performance. We find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry. |
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