Executive pay based on relative performance ties compensation more closely to the effort and ability of the executive than pay schemes that are tied to the firm's absolute stock price.

Question

Quizplus · Accepted Answer

Relative performance-based pay means that executive compensation is tied to how well the company performs compared to its competitors, rather than just the absolute stock price. This incentivizes the executive to focus on improving their company's performance relative to the market, which requires effort and skill. Therefore, this option ties compensation more closely to the effort and ability of the executive.

Executive Pay Based on Relative Performance Ties Compensation More Closely