Peer Choice in CEO Compensation
Ana M. Albuquerque
Boston University Questrom School of Business
Gus De Franco
University of Toronto - Rotman School of Management
Rodrigo S. Verdi
Massachusetts Institute of Technology (MIT)
August 27, 2012
Current research shows that firms are more likely to benchmark against peers that pay their Chief Executive Officers (CEOs) higher compensation, reflecting self-serving behavior. We propose an alternative explanation: the choice of highly paid peers represents a reward for unobserved CEO talent. We test this hypothesis by decomposing the effect of peer selection into talent and self-serving components. Consistent with our prediction, we find that the association between a firm’s selection of highly paid peers and CEO pay mostly represents compensation for CEO talent.
Number of Pages in PDF File: 53
Keywords: executive compensation, benchmarking, peer groups
JEL Classification: G34, J31, J33
Date posted: March 22, 2009 ; Last revised: September 14, 2012
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