rTSR: Properties, Determinants, and Consequences of Benchmark Choice

49 Pages Posted: 30 Apr 2019 Last revised: 11 Jun 2021

See all articles by Paul Ma

Paul Ma

University of Minnesota

Jee-Eun Shin

University of Toronto - Rotman School of Management

Charles C. Y. Wang

Harvard University - Accounting & Control Unit; European Corporate Governance Institute (ECGI)

Date Written: May 13, 2021


We examine the properties, determinants, and consequences of peer benchmarks chosen by firms to evaluate relative total shareholder returns (rTSR) in executive relative performance contracts. Among firms that explicitly use rTSR, 60% select specific peer firms while 40% select a stock index as benchmarks. Consistent with the intent to filter out the systematic component of TSR, firms' chosen benchmarks exhibit a return-regression slope coefficient of 1 and remove a significant amount of systematic noise in TSR. However, index-based benchmarks are considerably noisier compared to those based on specific peers. Inconsistent with standard contracting models, firms using index-based benchmarks do not exhibit relatively lower pay-to-performance sensitivities, nor do they face lower gains from filtering precision. Instead, index-benchmark use is associated with weaker corporate governance and compensation consultants' preferences, which are uncorrelated with observable firm attributes. The use of index-based benchmarks is also associated with lower ROA, even after controlling for benchmarks' noisiness and companies' governance attributes. Our analyses suggest the salience of peer comparisons as an important attribute of relative performance benchmarks.

Keywords: Relative TSR; Measurement error; Systematic risk; Compensation consultants; Style effects; Benchmark salience

JEL Classification: G30, J33, M12, M52

Suggested Citation

Ma, Paul and Shin, Jee-Eun and Wang, Charles C. Y., rTSR: Properties, Determinants, and Consequences of Benchmark Choice (May 13, 2021). Harvard Business School Accounting & Management Unit Working Paper No. 19-112, Available at SSRN: https://ssrn.com/abstract=3380516 or http://dx.doi.org/10.2139/ssrn.3380516

Paul Ma

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.paulma.org

Jee-Eun Shin

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4

Charles C. Y. Wang (Contact Author)

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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