In recent years, legal scholars and economists have debated whether the rise of “common ownership” by large institutional investors dampens competition. The concern is that when asset managers such as the Big Three – BlackRock, Vanguard, and State Street – hold stakes in multiple competing companies, they might encourage those firms to compete less aggressively with one another or even collude. One way asset managers might soften competition is through executive compensation: Common owners could restructure executive pay packages at the companies they own to blunt incentives for cut‑throat competition.

Common owners might discourage relative performance evaluation (RPE), a popular pay practice that rewards executives for outperforming peers. A typical RPE award pays top managers more, whether in cash or shares, when their firm outperforms rivals on metrics such as return on equity or total shareholder return. RPE therefore aligns pay with competitive success and motivates managers to vie fiercely against competitors. Eliminating or weakening RPE could, in principle, enable tacit collusion and allow commonly owned firms to earn higher profits than they would in a fully competitive market.

In a recent paper, I test whether common owners reduce RPE at their portfolio firms and find clear evidence to the contrary. In fact, the Big Three exhibit strong preferences for RPE. I find evidence of this on three levels.

First, more common ownership, measured by how many industry peers share institutional owners, does not lead to reduced RPE use. Instead, firms with greater ownership stakes held directly by the Big Three are significantly more likely to adopt RPE. This positive effect persists even when the Big Three own stakes in multiple competing firms, directly contradicting the anti-competitive narrative. Furthermore, the prevalence of RPE increased substantially during my study’s sample period, from under one-third of firms using RPE in 2010 to nearly two-thirds by 2021, precisely as the Big Three’s market influence was growing.

Second, I analyze shareholder voting behavior on executive pay (“say-on-pay”) proposals. If common owners sought  to reduce competition through executive incentives, they would likely voice support for compensation packages without RPE. Instead, my findings indicate that firms receive greater shareholder support, especially from the Big Three, when their pay packages include explicit RPE measures.

Third, I explore whether common ownership affects firms’ choice of performance benchmarks, another subtle avenue to reduce competitive pressures. The results show the opposite: Firms with significant Big Three ownership tend to choose closely competing companies as performance benchmarks, not avoiding but rather enhancing competitive pressure.

Combining these findings, the paper’s core message is that common ownership has not led to weaker executive incentives for competition. Across multiple dimensions, including whether a firm adopts RPE, how shareholders vote on pay, and how peer groups are constructed, there is no support for the idea that common owners encourage collusion through CEO pay design. If anything, the influence of the largest common owners (the Big Three) is associated with more performance-based pay and thus potentially more competition among portfolio companies, not less.

Why do the Big Three support RPE in executive compensation? One explanation is that, in their stewardship roles, they generally advocate for robust pay-for-performance systems because these incentives align executives’ interests closely with long-term value creation. By linking executive compensation to relative performance, the Big Three can effectively hold executives accountable, ensuring firms strive for superior operational and financial results. Another plausible explanation is reputational: Given heightened regulatory and public scrutiny of their market power and influence, the Big Three may adopt a “blue sky” approach, endorsing transparent, competitive compensation structures like RPE to avoid any perception of collusion or conflicts of interest. By publicly supporting rigorous performance evaluation, these asset managers signal their commitment to fair competition and governance best practices.

From a policy perspective, these findings caution against heavy-handed regulatory interventions targeting common ownership, such as mandated divestitures or stringent antitrust constraints. Regulatory actions undertaken without clear evidence of anti-competitive harm could inadvertently disrupt beneficial governance practices, including effective executive incentive structures like RPE. Worse yet, such interventions might ultimately harm the millions of investors who rely on institutional asset managers for financial goals like retirement. Instead, policy should focus on enhancing transparency and accountability among large institutional investors, avoiding blanket restrictions that could unintentionally undermine their positive societal contributions.

My paper also makes an important technical contribution: Researchers should not treat institutional investors as a monolith, especially when studying common ownership. Regressing an RPE dummy on aggregate Direct Ownership and aggregate Common Ownership yields positive and statistically significant coefficients on the latter, but this is due to omitted variable bias. Separating these measures into four distinct categories, Big Three Direct Ownership, Big Three Common Ownership, Other Direct Ownership, and Other Common Ownership, reveals the true relationships. Regressing RPE on these four measures produces positive and statistically significant coefficients on Big Three Direct Ownership and small, statistically insignificant coefficients on the remaining three. Thus, researchers must consider the composition of institutional investors to avoid misattributing the effects of large asset managers such as the Big Three to common ownership.

My study demonstrates that fears regarding common ownership’s anti-competitive effects are likely overstated. Instead, large institutional investors, particularly the Big Three, play a constructive role in corporate governance by advocating for stronger performance-based executive pay structures that enhance rather than diminish competition.

This post comes to us from Professor Thomas Schneider at the University of Oklahoma, Price College of Business. It is based on his recent paper, “Executive Incentives Under Common Ownership,” forthcoming in the Journal of Corporate Finance, special issue on  Statistically Non-significant Results in Financial Economics, and available here.