In this paper, we make empirical analysis of the relationship between general manager's compensation and performance of corporation, and found out that ROE and RET have significant positive effect on compensation; however, there are lack of sensitivity between compensation and performance. We argue that the existence of ratchet effect is one of the reasons that result in the lack of sensitivity of compensation and performance. In addition, we exam the existence and way of ratchet effect and found out that the ratchet effect based on aggregate stock price performance of business with same size and industry does not exist. We conclude that the application of RPE model, in which the chosen referring performance is aggregate performance of the business of same size and industry, can avoid the influence of ratchet effect on general manager's compensation contract and increase the efficiency of compensation contract.

compensation    ratchet effect    relative performance evaluation