Does the Use of Peer Groups Contribute to Higher Pay and Less Efficient Compensation?
Posted: 28 Sep 2007
We provide empirical evidence on how the practice of competitive benchmarking affects CEO pay. We find that the use of benchmarking is widespread, and has a significant impact on levels and changes in CEO compensation. The practice is controversial and one view is that it is inefficient because it can lead to increases in executive pay not tied to firm performance. A contrasting view is that benchmarking can be a practical and efficient mechanism to gauge the market wage necessary to retain valuable human capital. Our empirical results generally support the latter view. Our results also suggest that the documented asymmetry between CEO pay and luck is more likely to reflect the firm's desire to adjust pay for retention purposes and is not the result of rent seeking behavior on the part of the CEO.
JEL Classification: G34, J31, J33
Suggested Citation: Suggested Citation