Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section

Posted: 3 Jan 2004

See all articles by Gerald T. Garvey

Gerald T. Garvey

Blackrock

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Abstract

Little evidence exists that firms index executive compensation to remove the influence of marketwide factors. We argue that executives can, in principle, replicate such indexation in their private portfolios. In support, we find that market risk has little effect on the use of stock-based pay for the average executive. But executives' ability to "undo" excessive market risk can be hindered by wealth constraints and inalienability of human capital. We replicate the standard result that there is little relative performance evaluation (RPE) for the average executive, but find strong evidence of RPE for younger executives and executives with less financial wealth.

Suggested Citation

Garvey, Gerald T. and Milbourn, Todd T., Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section. Available at SSRN: https://ssrn.com/abstract=424753

Gerald T. Garvey (Contact Author)

Blackrock ( email )

Level 37, Chifley Tower
2 Chfiley Square
Sydney, NSW 2000
Australia
+61 2 9272 2388 (Phone)

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

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