Phantom Menace: Role of Pseudo Peers in CEO Compensation
89 Pages Posted: 13 Nov 2019
Date Written: October 31, 2019
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
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