Has the Use of Peer Groups Contributed to Higher Pay and Less Efficient Compensation?

50 Pages Posted: 11 Dec 2000

See all articles by John M. Bizjak

John M. Bizjak

Texas Christian University

Michael L. Lemmon

University of Utah - Department of Finance

Lalitha Naveen

Temple University - Department of Finance

Date Written: March 2007

Abstract

We provide empirical evidence on how the practice of competitive benchmarking affects CEO pay. We find that the use of benchmarking is widespread, and has a significant impact on levels and changes in CEO compensation. The practice is controversial and one view is that it is inefficient because it can lead to increases in executive pay that are not tied to firm performance. A contrasting view is that benchmarking can be a practical and efficient mechanism to gauge the market wage necessary to retain valuable human capital. Our empirical results provide some support for the latter view. We find that firms use competitive benchmarking to gauge the reservation wage necessary for retention. Our analysis also provides an alternative explanation for the documented asymmetry in the relationship between CEO pay and luck, which has previously been attributed to rent seeking behavior.

Keywords: Compensation, peer groups, compensation committees, CEO pay

JEL Classification: G30, G34, J31, J33

Suggested Citation

Bizjak, John M. and Lemmon, Michael L. and Naveen, Lalitha, Has the Use of Peer Groups Contributed to Higher Pay and Less Efficient Compensation? (March 2007). Available at SSRN: https://ssrn.com/abstract=252544 or http://dx.doi.org/10.2139/ssrn.252544

John M. Bizjak (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-4260 (Phone)

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Lalitha Naveen

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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