Industry Categories and the Politics of the Comparable Firm in CEO Compensation

Posted: 23 Feb 1999

See all articles by Joseph F. Porac

Joseph F. Porac

Emory University - Department of Organization & Management

James B. Wade

University of Wisconsin - Madison - Department of Management and Human Resources

Tim Pollock

affiliation not provided to SSRN

Abstract

We examine the blending of informational and political forces in organizational categorizations in the context of chief executive officer (CEO) compensation. By law, corporate boards are required to provide shareholders with annual justifications for their CEO pay allocations that contain an explicit performance comparison with a set of peer companies that are selected by the board. We collected and analyzed information on the industry membership of chosen peers from a 1993 sample of 280 members of the Standard and Poor's (S&P) 500. Our results suggest that boards anchor their comparability judgements within a firm's primary industry, thus supporting the argument that boards' peer definitions center around commonsense industry categories. At the same time, however, we found that boards selectively define peers in self protective ways, such that peer definitions are expanded beyond industry boundaries when firms perform poorly, industries perform well, CEOs are paid highly, and when shareholders are powerful and active.

JEL Classification: G31, G32, G34

Suggested Citation

Porac, Joseph Francis Allen and Wade, James B. and Pollock, Tim, Industry Categories and the Politics of the Comparable Firm in CEO Compensation. Available at SSRN: https://ssrn.com/abstract=150732

Joseph Francis Allen Porac

Emory University - Department of Organization & Management ( email )

1300 Clifton Road
Atlanta, GA 30322
United States
404-727-9738 (Phone)

James B. Wade (Contact Author)

University of Wisconsin - Madison - Department of Management and Human Resources ( email )

Madison, WI
United States

Tim Pollock

affiliation not provided to SSRN

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