Herding on Stars in CEO Compensation
62 Pages Posted: 13 Nov 2019 Last revised: 13 Sep 2021
Date Written: September 1, 2021
We study the compensation influence of highly central firms (“stars”) in CEO compensation peer networks. We find that lower-profile firms covertly tie CEO compensation to these influential “stars.” We propose a “Herding on stars” hypothesis: lower-profile, agency-prone firms herd on the same set of stars and avoid shareholder scrutiny. Better governance and reputable compensation consultants diminish herding. Herding-driven excess pay does not elicit negative ISS recommendations or shareholder opposition. Herding emerges after the 2006 SEC rule inadvertently identified firms with the greatest compensation influence. Evidence suggests that such herding contributes to the rapid increase in CEO pay at smaller, less visible firms.
Keywords: Executive pay, CEO compensation, CEO compensation benchmarking, star compensation peers, compensation herding
JEL Classification: G32, G34, J31, J33, M12, M52
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