Relative performance evaluation (RPE) is, at least on paper, enjoying widespread popularity in determining the level of executive compensation. Yet existing empirical evidence of RPE is decidedly mixed. Two principal explanations are held responsible for this discord. A constructional challenge arises from intricacies of identifying the correct peers. And on a simpler note, corporate commitments to RPE could be mere exercises in empty rhetoric. We address both issues and test the use of RPE in a new sample of large international non-U.S. banks. Taken as a whole, the banks in our sample show moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of banks that disclose the use of peers in their compensation schemes. This finding lends support to the credibility and thus informational value of RPE commitments. Digging deeper, we conclude that RPE usage is driven by firm size and growth options.

The rise in the level of executive compensation in international banking in the last two decades has been striking. At the same time, corporate declarations of relative performance evaluation (RPE) have enjoyed widespread popularity. RPE determines the level of CEO pay by accounting for common market shocks that are out of a CEO's control, providing better governance and incentivizing CEOs to maximize shareholder value. In this paper, we test for evidence of RPE in international banking and pay particular attention to banks that openly disclose its use. To that end, we collect compensation data on 46 large international banks. Taken as a whole, our sample shows moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of RPE-disclosing banks. These results hold up to a series of robustness checks. In addition, we find that the use of RPE is positively related to firm size and negatively related to growth options.

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Relative performance evaluation (RPE) is, at least on paper, enjoying widespread popularity in determining the level of executive compensation. Yet existing empirical evidence of RPE is decidedly mixed. Two principal explanations are held responsible for this discord. A constructional challenge arises from intricacies of identifying the correct peers. And on a simpler note, corporate commitments to RPE could be mere exercises in empty rhetoric. We address both issues and test the use of RPE in a new sample of large international non-U.S. banks. Taken as a whole, the banks in our sample show moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of banks that disclose the use of peers in their compensation schemes. This finding lends support to the credibility and thus informational value of RPE commitments. Digging deeper, we find that RPE usage is driven by firm size and growth options.