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We contribute to understanding the previously unrecognized consequences of individualized employment arrangements on the relationship between pay and performance. Increases in the application of pay-for-performance (PFP) idiosyncratic deals (PFP i-deals) raise questions about how individualized PFP arrangements affect the performance of peers who do not receive such customized deals. As pay systems become more individualized, understanding the economic ramifications of how PFP i-deals affect peer performance is essential for understanding the total unit effects of implementing PFP i-deals. To examine these peer effects, we explored peer responses to PFP i-deals and identified boundary conditions on broad theoretical assumptions underlying the conclusion that PFP increases unit performance. We tested our predictions by applying multilevel random-coefficient discontinuous growth models to a sample of 451 peers nested in 117 business units of a for-profit health-care organization. Immediately after PFP i-deal implementation in the unit, the performance level of peers was negatively affected. Additionally, peer performance trends after PFP i-deal implementation were lower than they were before the PFP i-deal implementation. Our study also identified contextual factors that influence peer responses to PFP i-deal implementation.

The effectiveness of relative performance evaluation (RPE) in compensation contracts depends on a firm's ability to identify peers that are subject to similar exogenous shocks with similar abilities to respond to such shocks. We expand the RPE literature by considering whether firms routinely select peers sharing a life cycle stage in RPE implementation. We argue that life cycle captures similarities in underlying economics and homogeneity along a number of dimensions relevant in filtering systematic performance. Using explicit peer firm disclosures and a peer selection model, we show that firms routinely select life cycle peers. Further, using implicit RPE tests, we document evidence of life cycle peers filtering common performance incremental to previously identified peer groups. We provide some of the first evidence that peer group composition differs with differing characteristics of the firm and its industry, highlighting that peer selection is a dynamic process evolving with the firm's changing nature.

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