This paper examines the benefits and costs of relative performance evaluation (RPE) in the context of top-level corporate management. RPE is a method of evaluating worker performance based on relative performance rather than absolute performance. The paper argues that RPE can provide incentives while partially insulating workers from common uncertainty. However, RPE also has costs, such as incentives to sabotage co-workers, collude with co-workers, and apply for jobs with inept co-workers. RPE is less desirable when the output of co-workers is expensive to measure or when there are production externalities, as in the case of team production. The paper focuses on the case of chief executive officers (CEOs), where the benefits of RPE are likely to exceed the costs. Rewarding CEOs based on performance measured relative to the industry or market creates incentives to take actions increasing shareholder wealth while insuring executives against the vagaries of the stock and product markets that are beyond their control. The paper finds strong empirical evidence supporting the RPE hypothesis—CEO pay revisions and retention probabilities are positively and significantly related to firm performance, but are negatively and significantly related to industry and market performance, ceteris paribus. The results also suggest that CEO performance is more likely to be evaluated relative to aggregate market movements than relative to industry movements. The paper also discusses the theory of RPE, including a simple model of the benefits of RPE and the disadvantages of rewarding workers based on relative performance. The paper concludes that RPE is a common feature of implicit CEO compensation and dismissal contracts because the potential benefit of filtering out common uncertainty is high, the cost of measuring the performance of other firms is small, and opportunities for sabotage and collusive shirking are limited.This paper examines the benefits and costs of relative performance evaluation (RPE) in the context of top-level corporate management. RPE is a method of evaluating worker performance based on relative performance rather than absolute performance. The paper argues that RPE can provide incentives while partially insulating workers from common uncertainty. However, RPE also has costs, such as incentives to sabotage co-workers, collude with co-workers, and apply for jobs with inept co-workers. RPE is less desirable when the output of co-workers is expensive to measure or when there are production externalities, as in the case of team production. The paper focuses on the case of chief executive officers (CEOs), where the benefits of RPE are likely to exceed the costs. Rewarding CEOs based on performance measured relative to the industry or market creates incentives to take actions increasing shareholder wealth while insuring executives against the vagaries of the stock and product markets that are beyond their control. The paper finds strong empirical evidence supporting the RPE hypothesis—CEO pay revisions and retention probabilities are positively and significantly related to firm performance, but are negatively and significantly related to industry and market performance, ceteris paribus. The results also suggest that CEO performance is more likely to be evaluated relative to aggregate market movements than relative to industry movements. The paper also discusses the theory of RPE, including a simple model of the benefits of RPE and the disadvantages of rewarding workers based on relative performance. The paper concludes that RPE is a common feature of implicit CEO compensation and dismissal contracts because the potential benefit of filtering out common uncertainty is high, the cost of measuring the performance of other firms is small, and opportunities for sabotage and collusive shirking are limited.