The Role of Peer Firm Selection and Award Design in Explicit Relative Performance Awards

77 Pages Posted: 2 Sep 2016 Last revised: 12 Feb 2020

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) have become an important component of executive compensation. We calculate the value and incentives of explicit RPE awards and find that RPE awards that use a custom peer group are structured both in terms of the peer group and payout design to filter out common shocks which is consistent with RPE theory. We find some evidence that firms select a broad market index over a custom peer group in order to increase award value. Our analysis also indicates that the overlap between RPE custom peers and compensation benchmarking peers constrains firms from biasing pay upwards.

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 and Award Design 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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