Summary: | This paper shows that higher common ownership of natural competitors is associated with more use of relative performance evaluation (RPE). First, I use compensation data from Execucomp and find that executives receive more rewards for outperforming peer firms if common ownership concentration increases. Second, I manually collect executive compensation contract details from 2014 proxy statements and show that the likelihood of using RPE increases with common ownership. Further, the size of incentive awards tied with RPE increases with common ownership. These findings suggest that institutional investors with common ownership exert a strong influence on executive compensation in a positive way: less alignment of pay with industry performance. I construct a measure of ownership by common owners and show that institutional investors with common ownership have a stronger influence on compensation than investors without common ownership. Finally, I use the inclusion to S&P 1500 index as an instrumental variable to support a causal connection. These findings signify the potential benefit from governance by large, diversified institutional investors with common ownership.
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