The Role of Peer Firm Selection in Explicit Relative Performance Awards

57 Pages Posted: 2 Sep 2016 Last revised: 11 Mar 2021

See all articles by John M. Bizjak

John M. Bizjak

Texas Christian University

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business

Brian Young

Wake Forest University

Date Written: January 1, 2020

Abstract

Explicit relative performance awards (RPE) are an important component of executive compensation. Using the contractual features of RPE awards, we calculate both their value and incentive properties. We find that, consistent with theory, RPE awards that use a custom peer group are structured, both in terms of peer selection and payout design, to filter out common shocks. We find some evidence that firms select a broad market index over a custom peer group in order to increase award value at the expense of award efficiency. Overall, our evidence suggests there is considerable heterogeneity in the effectiveness of RPE design.

Keywords: executive compensation, peer firm selection, relative performance awards, corporate governance

JEL Classification: M52, M55, J31, J33, G13, G17, G32, M12

Suggested Citation

Bizjak, John M. and Kalpathy, Swaminathan L. and Li, Zhichuan Frank and Young, Brian, The Role of Peer Firm Selection in Explicit Relative Performance Awards (January 1, 2020). Available at SSRN: https://ssrn.com/abstract=2833309 or http://dx.doi.org/10.2139/ssrn.2833309

John M. Bizjak (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-4260 (Phone)

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business ( email )

1151 Richmond Street North
London Ontario, Ontario N6A 3K7
Canada

Brian Young

Wake Forest University ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

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