Does the Use of Peer Groups Contribute to Higher Pay and Less Efficient Compensation?

Posted: 28 Sep 2007

See all articles by Michael L. Lemmon

Michael L. Lemmon

University of Utah - Department of Finance

John M. Bizjak

Texas Christian University

Lalitha Naveen

Temple University - Department of Finance

Abstract

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

Lemmon, Michael L. and Bizjak, John M. and Naveen, Lalitha, Does the Use of Peer Groups Contribute to Higher Pay and Less Efficient Compensation?. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1017338

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

John M. Bizjak (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-4260 (Phone)

Lalitha Naveen

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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