Does It Pay to “Be Like Mike”? Aspirational Peer Firms and Relative Performance Evaluation∗ Ryan T. Bally Jonathan Bonham Thomas Hemmer University of Michigan University of Chicago Rice University August 2017 Abstract We examine the manner and extent to which firms evaluate performance relative to aspirational peer firms. Guided by the predictions of an agency model, we find that CEO compensation increases in the correlation between own and aspirational peer firm performances. In addition, we define and test conditions where aggregate peer performance, which has been the primary focus of prior relative performance evaluation studies of competitive peers, is expected to have an association with CEO compensation. These conditions are supported by our empirical re- sults. Finally, we document that our results are more pronounced when the firm-peer relation- ship is one-way and the peer firm is in a different industry and therefore is more aspirational. JEL classification: G30, M12, M52. Keywords: aspirational peer groups; relative performance evaluation; performance correlation. ∗We appreciate helpful comments from Robert Bushman, Mirko Heinle, Raffi Indjejikian, Eva Labro, Abbie Smith and seminar participants at the Chinese University of Hong Kong, Hong Kong University of Science and Technology, the University of Chicago and the University of California at Berkeley. yCorresponding author: Stephen M. Ross School of Business, University of Michigan, 701 Tappan Street, Ann Arbor, MI 48109, email:
[email protected], phone: (734) 764–3175 1. Introduction Relative performance evaluation (RPE) stresses the importance of benchmarking firm perfor- mance to that of a group of peer firms. Beginning with Antle and Smith (1986), a vast number of empirical RPE studies have focused on the role of peer firms operating within the same competi- tive arena, which subjects them to common economic shocks.