Relating small business growth with success: some findings from the 2008 Western Australian small business benchmarks survey

With special reference to the technology sector, this study examines the effect of risktaking flexibility on the intensity of relative performance evaluation (RPE) in executive compensation. Idiosyncratic risks of high-tech firms are largely determined by managerial discretions. If RPE induces managers to take high risks, the use of RPE is restrained by the upward flexibility of risk taking. This is called the Risk-bounded RPE (RRPE) Hypothesis. Risk frontiers constructed from data envelopment analysis are used to measure risk-taking flexibility. The results from this study support the RRPE Hypothesis, which suggests that high-tech firms with high risk-taking flexibility are less likely to base executive compensation on relative performance.