The Effect of Social Interactions on Executive Compensation

54 Pages Posted: 9 Dec 2012 Last revised: 25 Mar 2014

See all articles by Qianqian Huang

Qianqian Huang

City University of Hong Kong

Feng Jiang

University at Buffalo - School of Management

Erik Lie

University of Iowa - Henry B. Tippie College of Business

Date Written: May 8, 2011

Abstract

We investigate whether and how executives’ social interactions affect their compensation. Using the social networks among 2,936 chief executive officers (CEOs) during 1999-2008, we report that socially connected CEOs receive significantly more similar compensation than non-connected CEOs. This result is robust to the inclusion of executive- and firm-fixed effects. We further find that CEO compensation responds to a peer’s change in pay caused by industry performance, especially if that change in pay is positive and the firm is suffering from weak corporate governance. We interpret these results as consistent with the notion that relative earnings concerns within social networks affect negotiations about compensation. Finally, we find that the past practice of backdating stock option grants spread across social networks, suggesting that social networks serve as a conduit for interpersonal information flow about compensation practices. Overall, our evidence suggests that peer effects in CEO compensation is due to both sharing of compensation matters and efforts to “keep up with the Joneses” within the network.

Keywords: executive compensation, social networks, option backdating, Pay for Luck, peer groups

JEL Classification: J31, J33, G34, M52

Suggested Citation

Huang, Qianqian and Jiang, Feng and Lie, Erik, The Effect of Social Interactions on Executive Compensation (May 8, 2011). Available at SSRN: https://ssrn.com/abstract=2186912 or http://dx.doi.org/10.2139/ssrn.2186912

Qianqian Huang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
852-3442-0284 (Fax)

Feng Jiang (Contact Author)

University at Buffalo - School of Management ( email )

344 Jacobs Management Center
Buffalo, NY 14260
United States
716-645-3225 (Phone)

Erik Lie

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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