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Do Japanese Firms Use Relative Performance Evaluation?

An Explicit Approach

##article.authors##

  • Sho Hayakawa Faculty of Commerce, University of Marketing and Distribution Sciences
  • Kento Inoue Faculty of Business Administration, Kindai University
  • Jumpei Hamamura Faculty of Business Administration, Momoyama Gakuin University https://orcid.org/0000-0001-6796-8903

DOI:

https://doi.org/10.51094/jxiv.135

Keywords:

Relative performance evaluation, peer group, contract theory, executive compensation, financial statement

Abstract

This study explores the use of relative performance evaluations in compensation contracts for managers in Japan. While previous studies of relative performance evaluations in Japan take an implicit approach based on statistical analysis, this study adopts an explicit approach to analyze the actual use of relative performance evaluation. As a result of our survey, this study obtained the following results. First, in Japan, 32 of the listed firms used relative performance evaluations, of which 5 use relative performance evaluations in cash compensation and 27 use relative performance evaluations in determining stock compensation. Second, seven of the 32 firms that used relative performance evaluations disclosed detailed information on peer groups. Finally, several firms did not use relative performance evaluations but information from other firms' compensation contracts to determine their compensation contracts. This study has the following three contributions. First, only a small number of Japanese firms used relative performance evaluation in executive compensation. Second, we find that a certain number of Japanese firms use the information on compensation contracts of other firms to determine compensation contracts. Finally, we suggest the possibility of using the information on the policy for executive compensation in the financial reports.

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Submitted: 2022-08-04 07:21:12 UTC

Published: 2022-08-08 05:24:22 UTC

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Economics, Business & Management