Relative Performance Evaluation and Competitive Aggressiveness

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 relation between the use of relative performance plans and competitive aggressiveness. Moreover—and consistent with our theoretical prediction—we find that this relation is stronger among firms with peer group overlap—i.e., the extent to which two firms select each other as peers in these incentive plans. Our findings indicate that these firms take more frequent as well as more complex competitive actions, relative to firms that do not use relative performance plans. Collectively, our findings provide evidence on how widely used executive incentive-compensation practices impact firm decisions