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An Evaluation of Compensation Benchmarking Peer Groups Based on Mutual Peer-Designating Behaviors

43 Pages Posted: 17 Aug 2016 Last revised: 10 Dec 2016

Jee-Eun Shin

Harvard Business School

Date Written: November 20, 2016

Abstract

In this paper, I argue that firms mutually recognizing each other as compensation benchmarking peers constitute viable competitors in the same CEO labor market, and that non-mutual peer relationships can serve as a tool to evaluate firms’ executive compensation practices. In particular, I ask why some of the firm’s chosen peers do not consider to select the base firm back despite listing other firms as compensation benchmarking peers. I hypothesize that such one-sided peer choices are driven either by rent extraction or motivational motives. My analyses show that firms with a larger proportion of such one-sided peer choices are associated with higher compensation via setting a higher benchmark level. Consistent with rent extraction motives, such firms are also associated with higher excess compensation and lower firm performance. In additional analyses, I show that the proportion of one-sided peers increases when firms adjust their benchmark level upward by adding higher compensated peers and/or dropping lower compensated peers. Collectively, the findings suggest that patterns in mutual compensation benchmarking peer-designating behaviors can serve as a tool to evaluate firms’ executive compensation practices.

Suggested Citation

Shin, Jee-Eun, An Evaluation of Compensation Benchmarking Peer Groups Based on Mutual Peer-Designating Behaviors (November 20, 2016). AAA 2017 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=2823592

Jee-Eun Shin (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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