Peer Choice in CEO Compensation

Posted: 14 Sep 2012

See all articles by Ana M. Albuquerque

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)

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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 (JFE), Forthcoming, Rotman School of Management Working Paper No. 2146185, 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)

Gus De Franco

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

7 McAlister Drive
New Orleans, LA 70118
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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