Preaching water but drinking wine? Relative performance evaluation in international banking

Dragan Ilić (), Sonja Pisarov () and Peter S. Schmidt ()
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Dragan Ilić: ETH Zurich, CER Center of Economic Research
Sonja Pisarov: University of Zurich
Peter S. Schmidt: University of Geneva, the Geneva Finance Research Institute

Swiss Journal of Economics and Statistics, 2019, vol. 155, issue 1, 1-25

Abstract: Abstract The rise in the level of executive compensation in international banking in the last two decades has been striking. At the same time, corporate declarations of relative performance evaluation (RPE) have enjoyed widespread popularity. RPE determines the level of CEO pay by accounting for common market shocks that are out of a CEO’s control, providing better governance and incentivizing CEOs to maximize shareholder value. In this paper, we test for evidence of RPE in international banking and pay particular attention to banks that openly disclose its use. To that end, we collect compensation data on 46 large international banks. Taken as a whole, our sample shows moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of RPE-disclosing banks. These results hold up to a series of robustness checks. In addition, we find that the use of RPE is positively related to firm size and negatively related to growth options.

Keywords: Relative performance evaluation; Executive compensation; Peer group; Banks; Disclosure (search for similar items in EconPapers)
JEL-codes: D86 G21 G3 J33 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1186/s41937-019-0032-8

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