Supply Network Linkages and CEO Compensation Contracts

Abstract

This paper investigates the impact of firms’ positions in the network of intersectoral input-output linkages on the use and implementation of relative performance evaluation in CEO compensation contracts. Consistent with a fundamental but not thoroughly investigated prediction from principal-agent theory, we find that firms positioned more centrally or upstream in the supplier network and, hence, more exposed to exogenous interindustry shocks propagating through the network, more frequently compensate CEOs based on relative performance. Further, more central or upstream firms are more likely to measure performance relative to broad indices of firms as opposed to small groups of self-selected peers.