Why Have CEO Pay Levels Become Less Diverse?

97 Pages Posted: 2 Nov 2020 Last revised: 27 Apr 2021

See all articles by Torsten Jochem

Torsten Jochem

University of Amsterdam

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Anjana Rajamani

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 12, 2021

Abstract

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

Jochem, Torsten and Ormazabal, Gaizka and Rajamani, Anjana, Why Have CEO Pay Levels Become Less Diverse? (April 12, 2021). European Corporate Governance Institute – Finance Working Paper 707/2020, Available at SSRN: https://ssrn.com/abstract=3716765 or http://dx.doi.org/10.2139/ssrn.3716765

Torsten Jochem (Contact Author)

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018TV
Netherlands

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anjana Rajamani

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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