Year: 2025
Type: article
Abstract: This study examines the association between firms' intra-industry performance ranking and the use of relative performance evaluation (RPE) in executive compensation plans. I find an inverted U-shape association between firms' intra-industry performance ranking and the use of RPE (i.e., compared to bottom-and top-ranked firms, middle-ranked firms are more likely to use RPE). This effect could be explained by the availability of similar peers in RPE incentive contracting: I find that both bottom-and top-ranked firms have fewer similar peers, limiting their opportunities to efficiently practice RPE compared to middle-ranked firms. Finally, the inverted U-shape association is more pronounced for firms with higher potential costs induced by heterogeneous peers and for RPE that uses self-selected peer groups. Overall, this study provides new evidence of the determinants of RPE use and suggests that the incentivization effect of RPE compensation plans varies with firms' intra-industry performance ranking.
Source: Abacus
DOI: 10.1111/abac.12361
Author: Xiaohua (Stephen) Wu
Institution: University of Wollongong
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4407373330