34 Pages Posted: 18 Mar 2012 Last revised: 14 May 2014
Date Written: March 15, 2012
Firms routinely justify CEO compensation by benchmarking against companies with highly paid CEOs. We examine whether the 2006 regulatory requirement of disclosing compensation peers mitigated firms’ opportunistic peer selection activities. We find that strategic peer benchmarking did not disappear after enhanced disclosure. In fact, it intensified at firms with low institutional ownership, low director ownership, low CEO ownership, busy boards, large boards, and non-intensive monitoring boards, and at firms with shareholders complaining about compensation practices. The effect is also stronger at firms with new CEOs. These findings call into question whether disclosure regulation can remedy potential problems in compensation practices.
Keywords: disclosure regulation, corporate governance, executive compensation, peer groups, benchmarking
JEL Classification: G34, J31, J33
Suggested Citation: Suggested Citation
Faulkender, Michael W. and Yang, Jun, Is Disclosure an Effective Cleansing Mechanism? The Dynamics of Compensation Peer Benchmarking (March 15, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2024129 or http://dx.doi.org/10.2139/ssrn.2024129
By Kevin Murphy