Working Paper: CEPR ID: DP15115
Authors: Matthew J. Bloomfield; Catarina Marvao; Giancarlo Spagnolo
Abstract: We examine whether the potential for costly sabotage is a deterrent to firms' use ofrelative performance evaluation ("RPE") in CEO pay plans. We exploit illegal cartelmembership as a source of variation in the potential for costly sabotage and documentthat firms are more likely to use RPE if they are currently cartel members. Moreover,firms frequently drop RPE from their CEOs' pay plans immediately after their cartelsare detected. We further provide suggestive evidence thatthe potential for costly sabotage explains these patterns; cartel membership severs theempirical association between RPE and competitive aggression.
Keywords: compensation; collusion; cartels; relative performance evaluation; sabotage
JEL Codes: G34; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cartel Membership (D71) | Use of RPE (L97) |
| Cartel Membership in Concentrated Markets (L12) | Use of RPE (L97) |
| Cartel Termination (L12) | Dropping RPE from CEO's Pay Packages (M12) |
| Use of RPE (L97) | Aggressive Behavior in Non-Cartel Firms (L29) |
| Cartel Membership (D71) | Mitigation of Aggressive Behavior (C92) |