Peer Choice in CEO Compensation

Albuquerque, Ana M.; De Franco, Gus; Verdi, Rodrigo S.

doi:10.2139/ssrn.1362047

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Peer Choice in CEO Compensation

53 Pages Posted: 22 Mar 2009 Last revised: 14 Sep 2012

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

There are 2 versions of this paper

Date Written: August 27, 2012

Abstract

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.

Keywords: executive compensation, benchmarking, peer groups

JEL Classification: G34, J31, J33

Suggested Citation: Suggested Citation

Albuquerque, Ana M. and De Franco, Gus and Verdi, Rodrigo S., Peer Choice in CEO Compensation (August 27, 2012). Available at SSRN: https://ssrn.com/abstract=1362047 or http://dx.doi.org/10.2139/ssrn.1362047