The Choice of Peers for Relative Performance Evaluation in Executive Compensation

Peer choice in CEO compensation

John Bizjak, Swaminathan Kalpathy, Zhichuan Frank Li and Brian Young

Review of Finance, 2022, vol. 26, issue 5, 1217-1239

Abstract: Relative performance evaluation (RPE) awards have become an important component of executive compensation. We examine whether RPE awards, particularly the peer group, are structured in a manner consistent with economic theory. For RPE awards using a custom peer group, we find that the custom group is significantly more effective than four plausible alternative peer groups at filtering out common shocks, lowering the cost of compensation, and increasing managerial incentives. For RPE awards using a market index, we find some evidence that firms could have selected a custom set of peers with better filtering properties at a lower cost with similar incentives. For example, firms could have saved around $118,000 in present value terms, on average, for an RPE award had they chosen a custom group comprising their product market peers instead of a market index.

Keywords: Executive compensation; Relative performance; RPE; Peer groups; Compensation benchmarking; Performance measures; CEO pay; Corporate governance (search for similar items in EconPapers)
JEL-codes: G13 G17 G32 J31 J33 M12 M52 M55 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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