Relative Performance Evaluation Research Articles

Relative Performance Evaluation and Strategic Peer‐Harming Disclosures

ABSTRACTMany firms use relative stock performance to evaluate and incentivize their CEOs their. We document that such firms routinely disclose information that harms their peers' stock prices, and sometimes explicitly mention the harmed peers, by name, in these disclosures. Consistent with deliberate sabotage, peer‐harming disclosures appear to be aimed at peers whose stock price depressions are most likely to benefit the disclosing firms' CEOs. The pricing effect of these disclosures does not reverse, suggesting that the disclosures contain legitimate information regarding peers' prospects. In sum, our results suggest that relative performance evaluation in CEO pay motivates CEOs to internalize the externalities of their disclosures, and strategically disclose information that harms peers' stock prices, in order to improve their firms' relative standing within their peer group.

Asymmetric Performance Evaluation Under Quantity and Price Competition with Managerial Delegation

Abstract In this paper, we consider asymmetric performance evaluation contracts under different product market configurations with managerial delegation and specify the optimal decision-making by the social and relative performance evaluation firms. We present a reversal result on the owner’s choice of the social performance and relative performance evaluation contract as the product market competition type changes from quantity to price competition. Surprisingly, results indicate that the consumer surplus increases as the degree of product substitution increases under quantity competition in a specific economic environment. A firm that considers social performance evaluation produces less, charges a higher price, and earns a lower profit than a firm that uses relative performance evaluation. We also endogenize the choice of performance evaluation systems. While relative performance emerges as the endogenous choice under both modes of product market competition, it leads to lower consumer surplus and social welfare in comparison to an asymmetric performance evaluation system.

The welfare effect of release timing of relative performance evaluation under quantity competition and asymmetric costs

AbstractWe examine the welfare effects of the endogenous decision and release timing of weight placed on the rival's profits under relative performance evaluation with quantity competition and asymmetric marginal costs. We find that when the advantaged firm decides and releases the weight as the leader, it always chooses a negative weight on relative performance evaluation, whereas the disadvantaged firm may choose a positive or negative weight depending on the degree of product substitution. Furthermore, we demonstrate that while all firms prefer to release weights early, this situation does not improve social welfare in several economic environments.

The Effect of Performance Measure Comparability and Discriminability on Measure Discontinuance

ABSTRACT This study investigates the effect of performance measure characteristics―comparability and discriminability―on performance measure discontinuance. Relative performance evaluation using comparable information offers a means of filtering out common shocks and capturing the subordinates’ own performance relative to that of peers. In addition, a measure’s ability to discriminate good from poor performance is important in the incentive contract. We show that since subordinates have an incentive to put effort into the comparable and discriminable performance measures, the superior is more likely to retain performance measures with greater comparability and discriminability. Using a large sample of performance evaluation data from 15 state-owned enterprises in South Korea over the period 1985–2021, we find that comparable and discriminable performance measures are less likely to be discontinued. Our study contributes to the performance evaluation literature by identifying two measure characteristics that influence the evolution of performance measures.

Relative performance evaluation of four bleeding risk scores in atrial fibrillation patients. What does the new DOAC score provide?

BackgroundRecently, the direct oral anticoagulant (DOAC) score was developed and better predicted major bleeding in DOAC-treated patients with atrial fibrillation (AF) than HASBLED did. Little is known on the new score's performance regarding other bleeding risk in AF. MethodsWe studied 14,672 patients diagnosed with AF between 2014 and 2018. During follow-up, we assessed the performance of DOAC score compared with the HASBLED, ORBIT and SWISS scores at predicting major bleeding in DOACs and non-DOACs users. Discrimination, calibration and decision curve analysis (DCA) were used to assess the risk scorer's performance. ResultsThere were 1484 (10.1%) patients on DOACs, 9730 on vitamin K antagonist (VKA), and 3458 on non-oral anticoagulants. Over a median of 3.5 years of follow-up, 79 major bleedings occurred in the DOAC patients, and 486 in the VKA patients (cumulative incidences = 7.4 and 13.9 per 100 patient-years, respectively).Amongst the DOAC patients, the DOAC score discrimination was moderate (C-statistic = 0.711), but significantly higher than HASBLED (C = 0.640; p = 0.03), ORBIT (C = 0.660; p = 0.04), and SWISS scores (C = 0.637; p = 0.002). The DCA showed higher net benefit using DOAC score compared with the remaining scores.In the VKA patients, DOAC score showed the highest discrimination (c-statistic = 0.709), followed by ORBIT (C = 0.692; p = 0.07), HASBLED and SWISS (C = 0.635 and 0.624, respectively; p < 0.01). All risk scores calibrated well, although HASBLED showed relatively poor calibration. ConclusionsThe new DOAC bleeding risk score is a valid and reasonable predictor of major bleeding over a median of 3.5 years of follow-up. Physicians can be reassured about the applicability of DOAC score for bleeding risk stratification in AF patients. RegistrationURL: https://www.clinicaltrials.gov; Unique identifier: NCT04364516

Relative performance evaluation in spillover networks

In a multi-agent contracting problem, agents are linked in performance through two channels, effort spillover, governed by spillover network, and risk correlation, governed by risk structure. Assigning compensation weights on peers' performances can not only filter out common risks but also alter agent's incentives. We study how the network and risk structure jointly determine the optimal linear contract. First, the relative compensation sensitivity is determined by ratio of the dot product, between spillover vector and pure hedge portfolio, to unhedgeable risk. We then propose an index named informativeness along the spillover direction and argue that this index measures how precisely the principal can infer the agent's effort. By showing that both the implemented effort and induced welfare are increasing in the informativeness index, we argue that this index captures how central each agent is in this economy. Finally, results regarding relative sensitivities still hold under optimal contract with bounded compensation.

경영자 능력과 상대적 성과평가의 비교기업 선정

The purpose of this study is to find out whether companies consider CEO ability to choose peer groups in relative performance evaluation. For empirical analysis, this study used US listed companies, and the primary empirical results are as follows. First, the performance of peers is significantly related with CEO compensation scheme when peers are selected by reflecting the similarity of CEO ability between companies within the same industry. Second, the performance of peer companies significantly affects CEO performance evaluation when peers are chosen by taking into account the similarity of the industry, firm size, and CEO ability. These results imply that firms consider similarity of CEO ability in peer group as well as common risk factors of peers to increase the usefulness of relative performance evaluation. This study enhances the understanding of the relative performance evaluation in CEO compensation by finding that CEO ability can be reflected as a selection criterion for peer companies in relative performance evaluation.

Peer-Specific Knowledge and Peer Group Properties in Relative Performance Evaluation

ABSTRACT Although relative performance evaluation (RPE) represents an important compensation practice, selecting a relevant peer firm poses a challenge for compensation committees. We study the implications of a committee’s peer-specific knowledge for the peer group property (i.e., RPE relevance). Committees likely know more about firms within their networks, and such peer-specific knowledge increases with their connections to potential peer firms. Our findings suggest that peer-specific knowledge facilitates not only the inclusion of more relevant peer firms, but also the exclusion of less relevant ones. Moreover, the committees incorporate connected peers’ performance information to a greater extent for risk removal. We address identification challenges by including an intensive set of fixed effects to control for characteristics of the focal and the peer firms and by exploiting exogenous changes to the connections between the committees and the peer firms. Our findings suggest that the compensation committee’s peer-specific knowledge facilitates the RPE practice. Data Availability: All data used in this study are publicly available. JEL Classifications: D22; M52; I19.

Optimal Dynamic Relative Performance Evaluation

ABSTRACT The theoretical prediction of a negative coefficient on positively correlated peer performance underlies much of the empirical literature on relative performance evaluation. This prediction is commonly obtained from a single period model where the variance–covariance matrix of available performance measures is exogenously restricted to be independent of the evaluee’s action. Using the dynamic approach of Holmström and Milgrom (1987), I study the properties of contracts that optimally condition an agent’s compensation both on his own performance and on how well he fares relative to a peer (group) when these restrictions are not imposed. I show that if the covariance is nonzero, the optimal contract is linear in own and peer performance as well as in their correlation. Significantly, and in line with the preponderance of the empirical evidence, in its simplest and perhaps most reasonable form, the model predicts that the expected coefficient on peer performance is exactly zero.

Relative performance evaluation with business group affiliation as a source of common risk

This study examines relative performance evaluation (RPE) for CEO compensation in business groups called “chaebols” in Korea. We find strong evidence of RPE when peers are member firms within the same business group, particularly when a firm has an established compensation committee or is run by a professional CEO (rather than a family CEO). This result is consistent with the argument that the affiliated firms within a business group may face significant common shocks affecting their performance. Therefore, aggregate group performance may be an excellent RPE benchmark for filtering out common risks from CEO compensation measurement.

Estimating the sensitivity of CEO compensation to gross versus net accounting performance

AbstractIn empirically estimating the relation between CEO compensation and accounting‐based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher's use of CEO compensation as a regression's dependent variable and as an expense in defining a regression's independent variables representing accounting‐based firm and peer performance will bias the researcher's pay‐for‐performance and relative performance evaluation (RPE) regression coefficients. In a panel estimation of CEO compensation, we document an attenuation bias in the coefficients on net firm and net peer performance. This evidence may partially explain inferences of weak CEO incentives and limited usage of RPE in prior work. Our results imply that in CEO compensation regressions, a researcher can remove biases in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables—that is, by adding back CEO compensation expense to net accounting measures.

Relative performance evaluation and wage inequality

AbstractThis paper studies the impact of relative performance evaluation (RPE) on skilled‐unskilled wage inequality. We find that in an economy with full employment, skilled‐unskilled wage inequality will be expanded when the strength of RPE increases. However, when the urban sector is under the minimum wage restriction, the impact of RPE on skilled‐unskilled wage inequality depends on the substitution elasticity between land and unskilled labor in the rural sector. If this substitution elasticity is sufficiently large (resp. small), skilled‐unskilled wage inequality will be expanded (resp. narrowed down) when the strength of RPE rises.

Collective vs. Relative Performance Evaluation with Career Concerns

Collective vs. Relative Performance Evaluation with Career Concerns

The relationship between accounting-based relative performance evaluation (RPE) and CEO compensation

This paper explores the relationship between Accounting-Based Relative Performance Evaluation (RPE) and CEO compensation within the context of corporate governance. The theoretical foundations for RPE are agency theory, economic theory, and stakeholder theory, and the study explores the complexities of CEO compensation, incorporating frameworks like agency theory, tournament theory, and human capital theory. Employing a qualitative descriptive approach, the paper analyzes existing literature to unravel the applications, benefits, and challenges of RPE in CEO compensation. The results and discussion section scrutinizes the RPE process, emphasizing peer benchmarking, defining performance metrics, quantifying relative performance, adjusting for external factors, and incorporating risk and effort sharing. Accounting-Based RPE emerges as a critical subset, offering financial alignment, objective performance metrics, and a shareholder value focus. The paper acknowledges challenges, including data accuracy, comparability issues, and concerns about short-termism. Furthermore, it underscores the integral role of corporate governance in shaping the impact of RPE on CEO compensation.

Relative performance evaluation of machine learning algorithms for land use classification using multispectral moderate resolution data

Analyses of spatial and temporal patterns of land use and land cover through multi-resolution remote sensing data provide valuable insights into landscape dynamics. Land use changes leading to land degradation and deforestation have been a prime mover for changes in the climate. This necessitates accurately assessing land use dynamics using a machine-learning algorithm’s temporal remote sensing data. The current study investigates land use using the temporal Landsat data from 1973 to 2021 in Chikamagaluru district, Karnataka. The land cover analysis showed 2.77% decrease in vegetation cover. The performance of three supervised learning techniques, namely Random Forest (RF), Support Vector Machine (SVM), and Maximum Likelihood classifier (MLC) were assessed, and results reveal that RF has performed better with an overall accuracy of 90.22% and a kappa value of 0.85. Land use classification has been performed with supervised machine learning classifier Random Forest (RF), which showed a decrease in the forest cover (48.91%) with an increase of agriculture (6.13%), horticulture (43.14%) and built-up cover (2.10%). Forests have been shrinking due to anthropogenic forces, especially forest encroachment for agriculture and industrial development, resulting in forest fragmentation and habitat loss. The fragmentation analysis provided the structural change in the forest cover, where interior forest cover was lost by 27.67% from 1973 to 2021, which highlights intense anthropogenic pressure even in the core Western Ghats regions with dense forests. Temporal details of the extent and condition of land use form an information base for decision-makers.

Relative performance evaluation in organizations with information networks

Relative performance evaluation in organizations with information networks

Improving relative performance evaluation process of employees within a peer group

PurposeRelative performance evaluation (RPE) is a widely practiced employee appraisal process in the services industry. In a global delivery model, teams are spread across different geographical locations. The team members work on various tasks under the guidance of different managers and at times under more than one manager for performing the same task. Such complexities make RPE of the team members quite challenging. The paper proposes a methodical step-by-step approach to simplify the evaluation process without compromising on the rigour.Design/methodology/approachRPE has followed three different approaches. First is the traditional way, wherein evaluators had a common meeting to discuss and arrive at relative evaluation and ranking of members of the peer group employees. In the second, the number of evaluators and employees in a peer group were split in to 2 subgroups. The evaluators provided independent ratings and rankings. Simple mathematical tool then derived the combined ranking. In the third approach, each evaluator evaluated each employee in the peer group and provided the relative ranking for each employee. Again, mathematical tools provided the final ranking considering inputs from all evaluators. All the three evaluation approaches were analysed through an inter-rater agreement method.FindingsAll the three approaches for evaluation provided similar results giving confidence that less time-consuming methods could be adopted by evaluators without compromising on the rigour of the evaluation. The outcome of the exercise proved effective as the complaints reaching the ombudsmen reduced as compared to the earlier years. Considerable evaluation time was also saved. The study described in this paper is carried out in a non-unionized, Indian private sector services firm. Its effectiveness in other set ups is yet to be tested.Research limitations/implicationsThe research is carried out in the Indian Engineering services firm operating in the Knowledge based sector. Though study results are encouraging, the adaptability of methodology across different sectors and geographies is yet to be tested. More broad based studies are needed to evaluate suitability across firms and regions.Practical implicationsRelative evaluation exercise is challenging for evaluators. Although openness in evaluation is desired, it also makes evaluators uncomfortable in appearing to be taking sides or being opposing a candidate's ranking. The proposed approach brings in anonymity to each evaluator without scarifying individual evaluation.Social implicationsThe proposed methodology can be deployed across different services industries as the proposed methodology is business domain agnostic. It can be easily ported and tailored to align with an individual organization's evaluation philosophy. The suitability and effectiveness of the method can be studied under various types of firms like manufacturing, private, public, NGO, labour oriented, etc. As the proposed method reduces efforts, the stake holders can focus on understanding the relation between employee performance measurement, employee engagement, and long-term outcomes related to employee performance evaluation.Originality/valueThe proposed employee evaluation method leverages inter-rater reliability and agreement tool as a consensus approach to the relative performance ranking exercise. Such an approach to relative performance ranking is original as no prior studies with such an approach are found in the existing Literature.

Activated carbon modified by Mo-doped CQDs: An efficient method to reduce the thermal hazard in toluene adsorption

Activated carbon (AC) is one of the typical adsorbents for industrial treatment of VOCs, but AC itself has a high calorific value. When the heat generated by low-temperature oxidation cannot be released, it is easy to store heat and oxidize spontaneously, resulting in immeasurable harm. Therefore, it is important to study and improve the thermal stability of AC. In this study, Mo-doped carbon quantum dots (CQDs) was synthesized to enhance the safety of AC usage. The structure of AC before and after modification was characterized by transmission electron microscope (TEM), Fourier transform infrared spectroscopy (FT-IR) and X-ray diffractometer (XRD). On the modified Mo-doped CQDs/AC, there are more crystalline structures formed by Mo oxides on the surface, which makes the intermolecular force on the surface of AC increase. At the same time, Mo oxide has strong oxidation resistance, which can inhibit the thermal decomposition process of AC, and has stronger stability. The spontaneous combustion tendency and thermal hazard of AC before and after modification were greatly improved. The heat released in the toluene adsorption by the modified AC at different temperatures was significantly lower than the heat released by the unmodified AC. According to the Langmuir adsorption isotherm, the adsorption performance of Mo-doped CQDs (2.5 wt%) was 1.6 times higher than that of AC when the system was 25 °C. The results showed that Na2MoO4 CQDs modified AC could effectively improve the thermal stability and greatly reduce the spontaneous combustion tendency. A relative fire safety performance evaluation model was also established to comprehensively evaluate the fire risk of VOCs treatment by AC.

최고경영자의 근속년수와 상대적 성과평가

[Purpose] The purpose of this study is to confirm whether CEO tenure is reflected in the selection criteria of the peer firm when companies select the peer firms for CEO’s relative performance evaluation in setting CEO compensation.&#x0D; [Methodology] For empirical analysis, this study used US non-financial listed companies.&#x0D; [Findings] The main results are as follows. First, the performance of the peer firms, which are formed based on the similarities of industry, the firm size, and the CEO’s tenure, is significantly associated with CEO compensation. Second, only the unsystematic performance measured based on the peer firm that reflects the same industry, the size of the firm and the tenure of CEO has a significant positive coefficient value in the verification of the strong form model. These results of the analysis of the CEO’s tenure can also be interpreted as reflecting the tenure of CEO in selecting the peer firms in order to motivate the CEO’s efforts toward maximizing firm value.&#x0D; [Implications] This study provides meaningful contribution to the literature based on finding that companies reflect CEO’s tenure as an additional criterion for selecting peer firms for CEO’s relative performance evaluation.

Institutional investors’ monitoring attention, CEO compensation, and relative performance evaluation

This paper examines whether the monitoring attention of institutional investors can influence CEO compensation. We find that higher motivated monitoring institutional ownership (IO) is associated with higher pay-performance-sensitivity of CEO compensation. Further, we find that only institutional investors with very high monitoring attention can positively affect the pay-performance-sensitivity. Finally, we document that CEO pay-performance-sensitivity is more, if not only, related to the unsystematic component of corporate performance in firms with higher monitoring IO. Collectively, our findings support the argument that firms with more monitoring IO provides more incentive compensation contract