The Role of Peer Firm Selection in Explicit Relative Performance Awards

Western Finance Association (WFA) Annual Conference 2017

European Finance Association (EFA) Annual Conference 2017

China International Conference in Finance (CICF) 2017

67 Pages Posted: 2 Sep 2016 Last revised: 8 Apr 2019

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

Southern Methodist University

Date Written: April 16, 2018

Abstract

Explicit relative performance awards (RPE) have become an important component of executive pay. We examine whether firms using explicit RPE select peers opportunistically to increase award payout, and also measure the economic magnitude of any bias. For awards that use a custom peer group, we find limited evidence of bias in peer selection. In contrast, we find evidence that firms select a broad market index over a custom peer group in order to increase award value. Our findings also indicate that the overlap between RPE peers and peers used for compensation benchmarking 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 in Explicit Relative Performance Awards (April 16, 2018). European Finance Association (EFA) Annual Conference 2017 ; China International Conference in Finance (CICF) 2017. 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

Southern Methodist University ( email )

United States

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