The Relative Performance Evaluation Puzzle

AbstractIt is postulated that Relative Performance Evaluation is largely absent in the determination of leaders'salaries. This paper investigates whether there is a reasonable solution to the Relative PerformanceEvaluation Puzzle. The historic theoretical and empirical roots of the Relative Performance EvaluationPuzzle is explained and it is discussed why the theory does not seems to hold empirically.This paper recognizes three main groups of solutions to the Relative Performance Evaluation Puzzle;The first group focuses on how strategic decision at the executive level change the Relative PerformanceEvaluation from a negative to a positive effect in order to support collusion between companies in thesame industry.The second group assumes that the CEO trades in the market and shows that CEO trading minimize theeffect of Relative Performance Evaluation.The last group looks at an imperfect job marked for CEOs, and on how that affects Relative PerformanceEvaluation.The conclusions of this paper is that strategic decisions makes the Relative Performance Evaluation out tobe positive in regards to accounting numbers, and that CEO trading removes the need for RPE in regard tomarket fluctuations which is also both shown to be supported empirically.2/76