Herding on Stars in CEO Compensation

62 Pages Posted: 13 Nov 2019 Last revised: 13 Sep 2021

See all articles by Swaminathan L. Kalpathy

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Yabo Zhao

The Chinese University of Hong Kong, Shenzhen

Date Written: September 1, 2021

Abstract

We study the compensation influence of highly central firms (“stars”) in CEO compensation peer networks. We find that lower-profile firms covertly tie CEO compensation to these influential “stars.” We propose a “Herding on stars” hypothesis: lower-profile, agency-prone firms herd on the same set of stars and avoid shareholder scrutiny. Better governance and reputable compensation consultants diminish herding. Herding-driven excess pay does not elicit negative ISS recommendations or shareholder opposition. Herding emerges after the 2006 SEC rule inadvertently identified firms with the greatest compensation influence. Evidence suggests that such herding contributes to the rapid increase in CEO pay at smaller, less visible firms.

Keywords: Executive pay, CEO compensation, CEO compensation benchmarking, star compensation peers, compensation herding

JEL Classification: G32, G34, J31, J33, M12, M52

Suggested Citation

Kalpathy, Swaminathan L. and Nanda, Vikram K. and Zhao, Yabo, Herding on Stars in CEO Compensation (September 1, 2021). Available at SSRN: https://ssrn.com/abstract=3480720 or http://dx.doi.org/10.2139/ssrn.3480720

Swaminathan L. Kalpathy (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Yabo Zhao

The Chinese University of Hong Kong, Shenzhen ( email )

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