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 (RPE) plans 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 more upstream in the supply network and, hence, more exposed to exogenous common shocks, are significantly more likely to compensate CEOs based on firm performance measured relative to peer firms. Further, firms that are more central or upstream more frequently choose peer firms that are substantial trade partners or are more similarly positioned in the supply network. Taken together, these results are consistent with boards of directors using RPE to filter out common shocks transmitted through supply network linkages in order to more accurately assess CEO performance and to partially insure CEOs against compensation risk.

Bio: Shawn Thomas is a Professor of Finance and the H.J. Heinz Faculty Fellow at the Katz Graduate School of Business at the University of Pittsburgh. Professor Thomas’ research interests include corporate finance, internal firm organization, and the industrial organization of vertical markets. He has published in the Journal of Finance, the Journal of Financial Economics, the Journal of Financial and Quantitative Analysis, the Journal of Business, the Journal of Corporate Finance, the Journal of Accounting and Economics, and the Journal of Accounting Research. He is a member of the American Finance Association, Western Finance Association, and the Finance, Organizations and Markets Research Group. He also serves as an associate editor for the International Review of Finance. Professor Thomas earned a BS in finance from West Virginia University and a PhD in finance from the University of Florida.