Baker (2002) has demonstrated theoretically that the quality of performance measures used in compensation contracts hinges on two characteristics: noise and distortion. These criteria, though, will only be useful in practice as long as the noise and distortion of a performance measure can be...

Influenced by their compensation plans, CEOs make their own luck through decisions that affect future firm risk. After adopting a relative performance evaluation (RPE) plan, total and idiosyncratic risk are higher, and the correlation between firm and industry performance is lower. The opposite...

After a merger, company officials face the challenge of making compensation schemes uniform and of redesigning teams with managers originating from companies with different incentives and working habits. In this paper, we offer a new way to investigate the relationship between executive pay and...

This paper explores performance measurement in incentive plans. Based on theory, we argue that differences in the nature of jobs between blue- and white-collar employees lead to differences in incentive systems. We find that performance measurement for white-collar workers is broader in terms of...

This paper explores performance measurement in incentive plans. Based on theory, we argue that differences in the nature of jobs between blue- and white-collar employees lead to differences in incentive systems. We find that performance measurement for white-collar workers is broader in terms of...

The rationale of RPE use in executive pay is to filter out common risk, not firm idiosyncratic risk. As common risk is often interpreted casually as non-diversifiable and firms’ idiosyncratic risks as totally independent of one another, we show that these casual interpretations contain three...

We study S&P 500 firms’ disclosure of relative performance evaluation (RPE) details in their first proxy statement filing after the effective date of an SEC rule mandating expanded executive compensation disclosures. Using theoretically-developed implicit techniques to detect RPE use, we...

I examine optimal incentives and performance measurement in a model where an agent has specific knowledge (in the sense of Jensen and Meckling) about the consequences of his actions for the principal. Contracts can be based both on "input" measures related to the agent's actions, and an "output"...

In this paper, the principal rewards an agent's farsighted effort both in the short- and long-term, with the short-term reward based on a noisy, forward-looking performance measure and the long-term reward based on a potentially less noisy, trailing performance measure. The main result is that...

I study the consequences of a random exposure to common risk for the purpose of relative performance evaluation (RPE) and find that it significantly affects the usefulness and the empirical measurement of RPE. According to my analysis, the magnitude of the exposure risk not only determines how...