We examine the effects of high ability from the compensation peer group on corporate innovation. Specifically, we test whether such a measure of relative peer quality by benchmarking the peers’ compensation is positively associated with citation outputs and patents outputs by using the S&P 1,500 from U.S firms. We find that external tournament incentives from it tends to increase innovation performance. In addition, we find that the peer effect is strengthened when firms have to rely on external financing to carry out innovations with high uncertainty. Overall, our study highlights the impact of pressures arising from comparisons with higher-ability peers when setting pay groups in corporate reward systems and corporate governance, and contribute on the literature on peer comparisons and their economic consequences.