Relative Performance Evaluation with Business Group Affiliation as a Source of Common Risk

This study examines relative performance evaluation (RPE) for the compensation of CEOs of business groups called “chaebols” in Korea. We find strong evidence of RPE when peers are other member firms in the same business group, particularly when a firm has an established compensation or is run by professional CEOs. We argue that the affiliation of business groups can be a significant common shock affecting the performance of firms in the group such that the aggregate peer performance can be used in RPE to filter the common risk out of CEO compensation for more efficient CEO incentive contracts