Review of Accounting Studies

, Volume 14, Issue 2, pp 269–306

Explicit relative performance evaluation in performance-vested equity grants

Authors

  • Mary Ellen Carter
    • Carroll School of ManagementBoston College
    • The Wharton SchoolUniversity of Pennsylvania
  • Sarah L. C. Zechman
    • Booth School of BusinessUniversity of Chicago
Article

DOI: 10.1007/s11142-009-9085-8

Cite this article as:
Carter, M.E., Ittner, C.D. & Zechman, S.L.C. Rev Account Stud (2009) 14: 269. doi:10.1007/s11142-009-9085-8

Abstract

Using data from FTSE 350 firms, we examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide exploratory evidence on whether the use or characteristics of RPE are associated with efforts to improve incentives by removing common risk, other economic factors discussed in the RPE literature, or external pressure to implement RPE. We find that many of these economic factors, including common risk reduction, are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors or others is associated with plans with tougher overall RPE conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. Further, we find evidence that vesting percentages vary in RPE and non-RPE plans.

Keywords

Compensation Equity incentives Relative performance Corporate governance

JEL Classification

G30 J33 M41 M52

Copyright information

© Springer Science+Business Media, LLC 2009