Compensation Contagion: The Role of Peer Benchmarking

We show that increases in CEO compensation at new S&P 500 members affect CEO compensation at other firms through compensation peer benchmarking. This compensation contagion propagates via three channels. Direct competition for managerial talent forces firms to respond to peers’ pay increases. Star chasing, which involves adding new S&P 500 members to compensation peer groups to justify higher pay, is associated with weak corporate governance. The peer-of-peer channel relies on indirect compensation peers and is most influential overall. Interestingly, we find minimal downward pressure on CEO compensation from companies removed from the S&P 500, confirming the asymmetric nature of contagion.

Keywords: CEO Compensation, Pay Contagion, Compensation Peers, S&P 500 Recomposition

JEL Classification: G34, J31, J33

Suggested Citation: Suggested Citation

Colak, Gonul and Yang, Jun and Ye, Pengfei, Compensation Contagion: The Role of Peer Benchmarking (August 31, 2017). Kelley School of Business Research Paper No. 17-67, Available at SSRN: https://ssrn.com/abstract=3030174 or http://dx.doi.org/10.2139/ssrn.3030174