Relative Performance Payment in Cooperatives – A Model-Theoretical Analysis

Governing the cooperatives’ management by payment systems turns out to be a non-trivial problem due to the specific characteristics of the legal structure. Evaluating the management’s performance is complicated by the business relations between members and their cooperative. A relative performance payment can make a significant contribution to the reduction of target inconsistencies between the members and the management of cooperatives. It is based on the idea that for evaluating the performance of a manager not only the company's results of its "own" company are used, but also the competitors’ or industry’s results. There are three advantages of a relative performance evaluation: • The inclusion of the results of other companies allows reducing systematic arising risks of the compensation scheme for the CEO. • The compensation scheme can include the cooperative’s profit for the evaluation of the market success and a comparison of the purchase prices for the members´ products in order to measure the member value. This will lead the CEO’s decisions and labor effort toward members´ aims. • The members can use the compensation scheme as a strategic variable to reduce competition intensity between the cooperatives. The paper considers the incentive characteristics of linear contracts based on relative performance evaluation for CEOs under the specific requirements of cooperatives. The analysis includes a comparison of different compensation schemes and their utility for cooperatives in several market scenarios.