Peer Choice in CEO Compensation

54 Pages Posted: 14 Sep 2012 Last revised: 12 Jan 2022

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Gus De Franco

Purdue University

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 2 versions of this paper

Date Written: September 13, 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 (September 13, 2012). Journal of Financial Economics, 108: 160 – 181., Available at SSRN: https://ssrn.com/abstract=2146185

Ana M. Albuquerque

Boston University - Questrom School of Business ( email )

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

HOME PAGE: http://sites.google.com/bu.edu/ana-albuquerque/home

Gus De Franco

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Rodrigo S. Verdi (Contact Author)

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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