Relative performance is well - relative. It counts the performances of both players in tournaments where both participated. If one player lost earlier than the other, for example, if Nadal lost in round of 32 and Federer made it to the finals, we count it as a relative win for Federer.
Relative performance points tries to measure how much was the difference in performance of the players - a player gets equal to the number of rounds he won in the tournament. So bigger margins between two players indicate that one was reaching later stages and other was losing early.
Of course, this has to be taken in context of the peak of the players. While you can compare Agassi with Federer, Agassi would have a much bigger performance advantage since Federer was just starting out during the days Agassi was winning Slams. Within contemporaries though, it should give you an indication of how much better really a player was.