Relative performance evaluation
Relative performance evaluation judges a manager against peers or a benchmark facing the same conditions, filtering out shared shocks like a recession so the appraisal reflects genuine outperformance, not luck.
FrameworkAgency theory
See it move
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A division's profit grows 4% this year while three comparable peers facing the same conditions average only 1% growth. Relative performance nets the two: 4% minus 1% equals 3 percentage points of outperformance beyond the shared industry trend, crediting genuine effort rather than a shock every peer also faced.
Where it fits
SubjectManagerial AccountingAdvancedTopicDivisional Performance MeasurementAdvanced
The formula
LaTeX
Variables
- Relative performance measure (percentage points or €)
- Manager's or division's own result (percentage or €)
- Average peer or benchmark result over the same period (percentage or €)
Nets a manager's result against how comparable peers performed over the same period, so shared shocks common to all of them are filtered out of the appraisal.