Phantom Menace: Role of Pseudo Peers in CEO Compensation

89 Pages Posted: 13 Nov 2019

See all articles by Swaminathan L. Kalpathy

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Yabo Zhao

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: October 31, 2019

Abstract

We study pay spillovers within the network of peer compensation benchmarking and show that these can reconcile growth differences and convergence in CEO compensation. Specifically, compensation of a small group of prominent, highly-central network firms is shown to have a substantial spillover effect on pay growth at other firms, especially peripheral firms for which the high-centrality firms are seldom compensation peers (hence, “pseudo peers”). The pseudo peer effect is prevalent in firms with agency problems and is mitigated by stronger governance. Better governed firms hire reputable compensation consultants that help determine compensation peers, mitigating the pseudo peer effect and enhancing firm performance. Interestingly, pay spillovers from prominent firms with large size and high compensation are displaced by spillovers from pseudo peers, after SEC requires firms to begin disclosing their compensation peers.

Keywords: CEO Pay, Compensation Benchmark, Peer Networks, Executive Compensation, Compensation Peers, Pseudo Peers

JEL Classification: G32, G34, J31, J33, M12, M52

Suggested Citation

Kalpathy, Swaminathan L. and Nanda, Vikram K. and Zhao, Yabo, Phantom Menace: Role of Pseudo Peers in CEO Compensation (October 31, 2019). Available at SSRN: https://ssrn.com/abstract=3480720 or http://dx.doi.org/10.2139/ssrn.3480720

Swaminathan L. Kalpathy (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Yabo Zhao

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

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