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Relative performance evaluation and competitive aggressiveness

Author

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  • Feichter, Christoph
  • Moers, Frank
  • Timmermans, Oscar

Abstract

We examine the relation between incentive plans based on relative performance and competitive aggressiveness. Using data on executive incentive-compensation contracts in large U.S. firms, we find a positive association between competitive aggressiveness and peer group overlap—that is, the extent to which two firms select each other as peers in these incentive plans. Our findings indicate that managers of such firms take more frequent as well as more complex competitive actions, relative to managers evaluated on relative performance without peer group overlap. Moreover, we show that these competitive tactics are more pronounced when managers compete against: (1) peers with similar grant sizes, (2) peers on similar performance metrics, and (3) peers in the same industry. Collectively, our findings provide evidence on how widely used incentive-compensation practices relate to strategic firm decisions.

Suggested Citation

  • Feichter, Christoph & Moers, Frank & Timmermans, Oscar, 2022. "Relative performance evaluation and competitive aggressiveness," LSE Research Online Documents on Economics 115630, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:115630
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    File URL: http://eprints.lse.ac.uk/115630/
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    References listed on IDEAS

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    1. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 49-100.
    2. Manski, Charles F, 1990. "Nonparametric Bounds on Treatment Effects," American Economic Review, American Economic Association, vol. 80(2), pages 319-323, May.
    3. Harris, MS, 1998. "The association between competition and managers' business segment reporting decisions," Journal of Accounting Research, Wiley Blackwell, vol. 36(1), pages 111-128.
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    Cited by:

    1. Kopel, Michael & Marini, Marco A., 2022. "Mandatory disclosure of managerial contracts in NGOs," Journal of Economic Behavior & Organization, Elsevier, vol. 199(C), pages 65-85.
    2. Weinzimmer, Laurence & Esken, Candace A. & Michel, Eric J. & McDowell, William C. & Mahto, Raj V., 2023. "The differential impact of strategic aggressiveness on firm performance: The role of firm size," Journal of Business Research, Elsevier, vol. 158(C).

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    More about this item

    Keywords

    collusion; competitive aggressiveness; peer group overlap; relative performance evaluation; strategic interaction;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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