But that isn't always how it works in practice. Executive pay packages that don't include a comparison of company performance and that of its competitors are regularly approved by boards of directors, and many have wondered why.

New research by University of Michigan professor Martin Schmalz and co-authors Miguel Anton and Mireia Gine of the IESE Business School and Florian Ederer of the Yale School of Management helps explain why—and why benchmarking happens more in some industries than in others.

They found that when companies in an industry are owned by the same shareholders, the executives tend to be rewarded relatively more for industry performance and less for their own company's performance. Read More