* Toughens peer group used to benchmark performance
* Rivals without investment-grade rating now excluded
FRANKFURT, Feb 21 (Reuters) - Daimler AG has toughened its performance standards by weeding out weaker rivals from a peer group used to calibrate profitability and senior managers' pay, the German carmaker's annual report showed.
The maker of Mercedes-Benz limousines said it will only compare itself with companies that have an investment-grade credit rating, a major shift which means it can no longer measure performance against weaker firms like France's Renault SA and Italy's Fiat SpA.
"This is significant because they are comparing themselves to competitors that are harder to keep up with. In the past Daimler often had it too easy," Metzler Bank automotive analyst Juegen Pieper said.
Investors have criticised Daimler's performance, and the profitability of its cars division, for lagging behind rivals BMW and Audi in the past.
Mercedes-Benz Cars had a return on sales from ongoing operations of 8 percent in the fourth quarter, up from 5.3 percent a year earlier.
The company aims to increase that to 10 percent in the medium term. BMW and Audi, both of which have yet to publish fourth-quarter results, last reported a quarterly automotive operating margin of 9 and 9.4 percent, respectively.
In 2012 and 2013, Daimler set pay for management board members partly by benchmarking the group's return on sales with that of BMW AG and Volkswagen AG, Fiat, Honda Motor Co, Volvo Car Group, Renault and Toyota Motor Corp.
In 2014, the group will change to include all stock-exchange-listed vehicle manufacturers with an automotive proportion of more than 70 percent and an investment-grade rating, the report said.
Daimler declined to comment on the exact composition of the peer group.
But specifying listed companies makes it likely that Volvo Cars, which is owned by Zhejiang Geely Holding Group, will drop out. Daimler will also be prevented from comparing itself with General Motors Co or Peugeot because they do not have investment-grade ratings.
Daimler might add Hyundai Motor Co and Ford Motor Co.
It will continue to use average return on sales as its performance measure, the report said.