Peer-Specific Knoweldge and Relative Performance Evaluation

We investigate how a compensation committee's peer-specific knowledge affects its ability to implement relative performance evaluations (RPE) in CEO compensation. Peer-specific knowledge refers to information about internal operations of (potential) peer firms. We predict that peer-specific knowledge will improve peer selection outcomes and will facilitate the use of peer performance information in contracting. Compensation committees likely acquire peer-specific knowledge through their members' social connections. For the peer selection outcome, we compare the relevance across peers (measured as common risk exposure) and find that connected peers are more relevant than non-connected peers. For the use of peer performance information, we find that compensation committees place greater weight on the performance of connected peers than that of non-connected peers. The later finding continues to hold after we control for the effect of peer selection. Taken together, our findings suggest that peer-specific knowledge facilitates the implementation of RPE for contracting benefits