Business Publications
Document Type
Article
Publication Date
2022
Journal
Review of Finance
URL with Digital Object Identifier
https://doi.org/10.1093/rof/rfac016
Abstract
Relative performance (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 of their product market peers instead of a market index.
Citation of this paper:
Bizjak, J., Kalpathy, S., Li, Z.F., and Young, B. 2022. Selection of Peer Firms in Relative Performance Evaluation (RPE) Awards. Review of Finance forthcoming
