Shifting the Goalposts? Analysing Changes to Performance Peer Groups Used to Determine the Remuneration of FTSE 100 CEOs
| Date | 01 April 2017 |
| Published date | 01 April 2017 |
| Author | Rodion Skovoroda,Alistair Bruce |
| DOI | http://doi.org/10.1111/1467-8551.12209 |
British Journal of Management, Vol. 28, 265–279 (2017)
DOI: 10.1111/1467-8551.12209
Shifting the Goalposts? Analysing Changes
to Performance Peer Groups Used to
Determine the Remuneration of FTSE 100
CEOs
Rodion Skovoroda and Alistair Bruce
Nottingham University Business School, Nottingham University, Jubilee Campus, Wollaton Road,
Nottingham NG8 1BB, UK
Corresponding author email: rodion.skovoroda@nottingham.ac.uk
This paper examinesyear-on-year changes to the composition of performance peer groups
used for relativeperformance evaluation in setting CEO pay in FTSE 100 companies and
finds evidence of peer selection bias. The authors find that firms keep their peer groups
weak by excluding relatively stronger performing peers. They also show that peer selec-
tion bias is less pronounced in firms with higher institutional investor ownership, which
suggests that institutional investors might be aware of the risks of peer selection bias.
The results suggest that peer group modifications can be viewed, at least in part, as an
expression of managerial rent-seeking.
Introduction
Stock-based compensation (SBC) has become an
increasingly significant component of executive
reward for UK CEOs, while the level of detail
and complexity in the design of the stock-based
element of pay has increased considerably since
the mid-1980s (e.g. Buck et al., 2003; Conyon
and Schwalbach, 2000; Goergen and Renneboog,
2011; Main, Bruce and Buck, 1996; Ozkan, 2011;
Renneboog and Zhao, 2011). Recent empirical
research documents the widespread use of relative
performance evaluation (RPE) in stock-based
incentive contracts where CEOs and managers
are evaluated on the basis of peer performance
and, in particular, the use of performance peer
groups in restricted share schemes, performance
share plans or long-term incentive plans (LTIPs)
(Carter, Ittner and Zechman, 2009; Gong, Li and
Shin, 2011). Empirical studies also document that
stock-based RPE is characterized by multiple
discretionary elements and find considerable
variations in specific RPE characteristics and
in their overall complexity across firms (Carter,
Ittner and Zechman, 2009).
Agency theory (e.g. Holmstrom, 1979, 1982;
Murphy, 1999) views performance-based pay in
general and SBC in particular as a key governance
mechanisms that help foster incentive alignment
between the interests of executives and sharehold-
ers. Assuming thatthe shareholders have complete
control over the process of pay design, the poten-
tial eciency gains from using RPE in incentive
contracts are well understood. Holmstrom (1979)
shows that the eciency of performance-based
pay as an incentive alignment mechanism crucially
depends on the amount of useful information that
performance measures such as the firm’s stock
price convey about CEO actions and about
the quality of CEO decisions. Agency theory
advocates the use of stock-based RPE on the
grounds that it helps to ‘de-noise’ CEO eort,
insulates risk-averse CEOs from non-firm-specific
risks common to the firm’s peers, and makes
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