Peer Choice in CEO Compensation

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

Ana M. Albuquerque

Boston University Questrom School of Business

Gus De Franco

Tulane University - A.B. Freeman School of Business

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Multiple version iconThere 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

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

Ana M. Albuquerque (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Gus De Franco

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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