Compensation Contagion: The Role of Peer Benchmarking

60 Pages Posted: 5 Sep 2017

See all articles by Gonul Colak

Gonul Colak

University of Sussex ; Hanken School of Economics

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Pengfei Ye

Virginia Tech

Date Written: August 31, 2017

Abstract

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

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

Gonul Colak

University of Sussex ( email )

Jubilee Building
Falmer
Brighton, BN1 9SN
United Kingdom

Hanken School of Economics ( email )

P.O. Box 479
Arkadiankatu 22
FI-00100 Helsinki, 00100
Finland

Jun Yang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

Pengfei Ye (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

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