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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Preaching water but drinking wine? Relative performance evaluation in international banking
Organization Unit
  • Dragan Ilić
  • Sonja Pisarov
  • Peter S Schmidt
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 208
ISSN 1664-7041
Number of Pages 30
Date 2016
Abstract Text 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.
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Keywords Relative performance evaluation, executive compensation, peers, banks, disclosure, Kreditwesen, Lohnsystem, Transparenz