Management Accounting Section Midyear Meeting

Playing It Safe: Relative Performance Evaluation and Peer Imitation

• In Event: Relative Performance Evaluation

Abstract

Relative performance evaluation (RPE) ties executives’ compensation to the performance of a peer group and has become central part of executives’ compensation contracts. We argue that RPE directs executives’ attention towards the selected peers and thereby increases the awareness of inter-firm relationships. As executives typically operate in uncertain environ-ments, we predict that RPE induces firms to imitate their peers. Using executive compensa-tion data from the largest U.S. firms from 2006 to 2017, we document that firms imitate stra-tegic practices of RPE performance peers. Moreover, we find that the degree of imitation increases in environmental uncertainty, peer firm similarity, relative performance, and RPE grant size. Our study has important implications for the design of executive compensation contracts and extends our understanding on the role of executives’ incentives in shaping cor-porate strategic behavior.

Authors

• Steffen Burkert, LMU Munich

• Nina Schwaiger, Ludwig-Maximilians-Universitaet