Implementing Relative Performance Evaluation: The Role of Life Cycle Peers

2017 ◽  
Author(s):  
Katharine D. Drake ◽  
Melissa Martin
Keyword(s):  
Performance Evaluation ◽  
Life Cycle ◽  
Relative Performance ◽  
Relative Performance Evaluation

Implementing Relative Performance Evaluation: The Role of Life Cycle Peers

2019 ◽  
Vol 32 (2) ◽  
pp. 107-135
Author(s):  
Katharine D. Drake ◽  
Melissa A. Martin
Keyword(s):  
Performance Evaluation ◽  
Life Cycle ◽  
Peer Group ◽  
Life Cycle Stage ◽  
Relative Performance ◽  
Data Availability ◽  
Relative Performance Evaluation ◽  
Peer Selection ◽  
Exogenous Shocks

ABSTRACT The effectiveness of relative performance evaluation (RPE) in compensation contracts depends on a firm's ability to identify peers that are subject to similar exogenous shocks with similar abilities to respond to such shocks. We expand the RPE literature by considering whether firms routinely select peers sharing a life cycle stage in RPE implementation. We argue that life cycle captures similarities in underlying economics and homogeneity along a number of dimensions relevant in filtering systematic performance. Using explicit peer firm disclosures and a peer selection model, we show that firms routinely select life cycle peers. Further, using implicit RPE tests, we document evidence of life cycle peers filtering common performance incremental to previously identified peer groups. We provide some of the first evidence that peer group composition differs with differing characteristics of the firm and its industry, highlighting that peer selection is a dynamic process evolving with the firm's changing nature. JEL Classifications: E32; J33; L2. Data Availability: All data are available from public sources.

Product Market Peers and Relative Performance Evaluation

2020 ◽  
Author(s):  
Sudarshan Jayaraman ◽  
Todd Milbourn ◽  
Florian Peters ◽  
Hojun Seo
Keyword(s):  
Performance Evaluation ◽  
Stock Returns ◽  
Product Market ◽  
Relative Performance ◽  
Relative Performance Evaluation ◽  
Common Shocks ◽  
Ceo Pay ◽  
Forced Turnover ◽  
Definition Of

We investigate the role of Relative Performance Evaluation (RPE) theory in CEO pay and turnover using a product similarity-based definition of peers (Hoberg and Phillips 2016). RPE predicts that firms filter out common shocks (i.e., those affecting the firm and its peers) while evaluating CEO performance and that the extent of filtering increases with the number of peers. Despite the intuitive appeal of the theory, previous tests of RPE find weak and inconsistent evidence, which we argue is due to the imprecise categorization of peers. Using product market peers, we find three pieces of evidence consistent with RPE in relation to CEO pay and forced turnover: (i) on average, firms partially filter out common shocks to stock returns, (ii) the extent of filtering increases with the number of peers, and (iii) firms completely filter out common shocks in the presence of a large number of peers.

scholarly journals Incentives, Information, and Organizational Form

2017 ◽  
Author(s):  
Yingyi Qian
Keyword(s):  
Performance Evaluation ◽  
Organizational Form ◽  
Relative Performance ◽  
Organizational Forms ◽  
Relative Performance Evaluation ◽  
Yardstick Competition

We model an organization as a hierarchy of managers erected on top of a technology (here consisting of a collection of plants). In our framework, the role of a manager is to take steps to reduce the adverse consequences of shocks that affect the plants beneath him. We argue that different organizational forms give rise to different information about managers’ performance and therefore differ according to how effective incentives can be in encouraging a good performance. In particular, we show that, under certain assumptions, the M-form (multi-divisional form) is likely to provide better incentives than the U-form (unitary form) because it promotes yardstick competition (i.e., relative performance evaluation) more effectively. We conclude by presenting evidence that the assumptions on which this comparison rests are satisfied for Chinese data.

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