Peer Choice in CEO Compensation
Posted: 14 Sep 2012
Date Written: September 13, 2012
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
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