Relative performance evaluation with business group affiliation as a source of common risk

Abstract

This study examines relative performance evaluation (RPE) for CEO compensation in business groups called “chaebols” in Korea. We find strong evidence of RPE when peers are member firms within the same business group, particularly when a firm has an established compensation committee or is run by a professional CEO (rather than a family CEO). This result is consistent with the argument that the affiliated firms within a business group may face significant common shocks affecting their performance. Therefore, aggregate group performance may be an excellent RPE benchmark for filtering out common risks from CEO compensation measurement.