Abstract Relative performance evaluation (RPE) is viewed as an efficient way to assess agents’ actions since it uses peer performance to insulate agents’ common risk (Holmstrom, 1982). This study examines whether the implementation of the Say on Pay vote (hereafter the SOP vote) enhances the use of RPE in executive compensation. The presence of RPE is jointly determined by a significantly positive coefficient on the firm’s unsystematic performance component and an insignificant or significantly negative coefficient on the firm’s systematic performance component. Using a U.S.-based sample from 2006 to 2023, we predict and find strong evidence for the increased use of RPE in executive compensation after the implementation of the SOP vote, particularly for firms with excess compensation. We also find that the increased use of RPE in the post-SOP-vote period exists in firms with non-price competition but not in firms with price competition. Overall, our study documents a positive regulatory effect on efficient contracting in executive compensation practice.
Sang et al. (Tue,) studied this question.