Preaching Water But Drinking Wine? Relative Performance Evaluation in International Banking

University of Zurich, Department of Economics, Working Paper No. 208

29 Pages Posted: 4 Nov 2015 Last revised: 2 Sep 2016

See all articles by Dragan Ilic

Dragan Ilic

University of Basel

Sonja Pisarov

University of Zurich

Peter Steffen Schmidt

University of Zurich - Department of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: October 22, 2015

Abstract

Relative performance evaluation (RPE) is, at least on paper, enjoying widespread popularity in determining the level of executive compensation. Yet existing empirical evidence of RPE is decidedly mixed. Two principal explanations are held responsible for this discord. A constructional challenge arises from intricacies of identifying the correct peers. And on a simpler note, corporate commitments to RPE could be mere exercises in empty rhetoric. We address both issues and test the use of RPE in a new sample of large international non-U.S. banks. Taken as a whole, the banks in our sample show moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of banks that disclose the use of peers in their compensation schemes. This finding lends support to the credibility and thus informational value of RPE commitments. Digging deeper, we conclude that RPE usage is driven by firm size and growth options.

Keywords: Relative performance evaluation, executive compensation, peers, banks, disclosure

JEL Classification: J33, D86, G3, G21

Suggested Citation

Ilic, Dragan and Pisarov, Sonja and Schmidt, Peter Steffen, Preaching Water But Drinking Wine? Relative Performance Evaluation in International Banking (October 22, 2015). University of Zurich, Department of Economics, Working Paper No. 208, Available at SSRN: https://ssrn.com/abstract=2685774 or http://dx.doi.org/10.2139/ssrn.2685774

Dragan Ilic (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Sonja Pisarov

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Peter Steffen Schmidt

University of Zurich - Department of Business Administration ( email )

Rämistrasse 71
Zurich, CH-8006
Switzerland

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