Why Have CEO Pay Levels Become Less Diverse?
97 Pages Posted: 2 Nov 2020 Last revised: 27 Apr 2021
Date Written: April 12, 2021
We document that the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within industry and size groups. We find evidence consistent with one explanation; reciprocal benchmarking (i.e., firms including each other in the set of peers used to benchmark pay). We find support for three factors contributing to the rise in reciprocal benchmarking; the mandatory disclosure of compensation peer groups, say on pay, and proxy advisory influence. Finally, we find that reciprocal benchmarking has meaningful economic consequences; lower external tournament incentives, lower risk-taking, lower stock performance, and higher stock return synchronicity within industries.
Keywords: Variation in executive pay, pay diversity, compensation benchmarking, pay transparency, pay disclosure, tournament incentives
JEL Classification: G3, G34, G38, M12, M52
Suggested Citation: Suggested Citation