The optimal choice of a relative performance indicator in product market competition

In this research, we analytically explore what performance indicator is optimal in a market competition when the firm’s owner compensates the CEO based on the relative performance evaluation. The relative performance evaluation considered in previous studies compares the firm’s profit with the competitor’s profit. However, when the firm evaluates the CEO’s performance, another performance indicator is often adopted instead of profit. As a result, we show that given specific economic conditions, the owners adopt sales as a relative performance indicator to evaluate the CEO’s performance. This result has some important implications for the research on relative performance evaluation. First, it will affect future studies showing that there are different possible choices of relative performance indicators in management accounting assuming product market competition. Second, our study has an important implication for empirical research on relative performance evaluation in management accounting, in which a relative performance indicator is adopted as an independent variable.