This paper examines the benefits and costs of relative performance evaluation (RPE) in the context of top-level management, particularly focusing on the compensation of chief executive officers (CEOs). RPE, which bases pay on an individual's performance relative to others, can provide incentives while reducing the impact of common uncertainties. However, it also introduces risks such as sabotage, collusion, and shirking. The authors argue that RPE is particularly beneficial for CEOs because the potential benefits of filtering out common uncertainty are high, the cost of measuring the performance of other firms is low, and opportunities for sabotage and collusive shirking are limited. The study uses a longitudinal sample of over 1,600 CEOs from more than 1,000 publicly held corporations to test for the presence of RPE in executive compensation. The results show that CEO pay revisions and retention probabilities are positively and significantly related to firm performance but negatively and significantly related to industry and market performance, indicating that RPE is indeed a common feature in CEO compensation contracts. Additionally, the findings suggest that CEO performance is more likely to be evaluated relative to aggregate market movements rather than industry movements. The paper also discusses the theoretical framework of RPE, including the economic rationale for RPE based on risk-sharing and the potential costs associated with RPE, such as the incentives for sabotage, collusion, and the choice of reference groups. The empirical evidence supports the hypothesis that RPE is a significant factor in CEO compensation, providing insights into the dynamics of corporate governance and executive compensation.This paper examines the benefits and costs of relative performance evaluation (RPE) in the context of top-level management, particularly focusing on the compensation of chief executive officers (CEOs). RPE, which bases pay on an individual's performance relative to others, can provide incentives while reducing the impact of common uncertainties. However, it also introduces risks such as sabotage, collusion, and shirking. The authors argue that RPE is particularly beneficial for CEOs because the potential benefits of filtering out common uncertainty are high, the cost of measuring the performance of other firms is low, and opportunities for sabotage and collusive shirking are limited. The study uses a longitudinal sample of over 1,600 CEOs from more than 1,000 publicly held corporations to test for the presence of RPE in executive compensation. The results show that CEO pay revisions and retention probabilities are positively and significantly related to firm performance but negatively and significantly related to industry and market performance, indicating that RPE is indeed a common feature in CEO compensation contracts. Additionally, the findings suggest that CEO performance is more likely to be evaluated relative to aggregate market movements rather than industry movements. The paper also discusses the theoretical framework of RPE, including the economic rationale for RPE based on risk-sharing and the potential costs associated with RPE, such as the incentives for sabotage, collusion, and the choice of reference groups. The empirical evidence supports the hypothesis that RPE is a significant factor in CEO compensation, providing insights into the dynamics of corporate governance and executive compensation.