Optimal choice of relative performance indicator and product market competition

Abstract

We explore what performance indicator is optimal in a market competition, when firm’s owner pays compensation based on relative performance evaluation (RPE) to CEOs. Comparing the firm’s own profit with competitor’s profit, prior studies examine the RPEs. However, in RPE practices, other performance indicator is often adopted as a performance indicator with the exception of profit. Based on this motivation, from our analysis, we demonstrate that owners adopt sales as a relative performance indicator to evaluate CEO’s performance in specific economic conditions. This result has following contributions to RPE studies. First, our result will establish the future research avenue about choice of relative performance indicator. Second, our study has an important implication to empirical RPE research.