Measured individual performance often depends on random factors which also affect the performances of other workers in the same firm, industry, or market. In these cases, relative performance evaluation (RPE) can provide incentives while partially insulating workers from the common uncertainty

Abstract Relative performance evaluation (RPE) in CEO compensation provides insurance against external shocks and yields a more informative measure of CEO actions. I argue that empirical evidence on the use of RPE is mixed because previous studies rely on a misspecified peer group. External shocks

This paper reexamines the issue of relative versus joint incentive schemes in a mul-tiagent moral hazard framework. It allows to contrast the inference dimension and the insurance property of relative performance evaluation. Importantly, the widespread idea that the principal should use all

In spite of strong theoretical motivation, empirical studies of executive compensation have provided only limited evidence of relative performance evaluation (RPE). Some research findings support a weak-form RPE hypothesis that executive pay is positively related to firm performance and negatively

In an oligopoly, firms strategically interact. This implies that their profits are interdependent. The Controllability Principle, therefore, argues that managerial performance should be evaluated based on both own-firm’s and rival-firms ’ profits, as such evaluations (i.e., a form of relative

Most observed managerial compensation packages do not filter out systematic economy-wide fluctuations (e.g., market indices, oil prices, macroeconomic variables). However, given that such shocks do not appear informative on individual actions, the limited use of relative performance evaluation (RPE

We analyze the role of relative performance evaluation when a principal has several agents, who face correlated shocks. If limited liability constraints are binding, relative performance evaluation may be of no value if the principal is restricted to symmetric contracts. However, with asymmetric

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Abstract: We study relative performance evaluation when managers have private information on their ability to make appropriate investment decisions. We assume that the joint distribution of an individual firm’s profit and market movements depends on the ability of the manager that runs the firm

Relative performance evaluation has been suggested as a means to overcome information asymmetry between regulators and organizations when assessing efficiency. By comparing similar organizations the relationship between costs and effort can be better isolated. The English Department of Health (Do