Why Have CEO Pay Levels Become Less Diverse?

94 Pages Posted: 23 Dec 2020

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)

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Date Written: December 2020

Abstract

We document that, over the last decade, the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within industry and industry-size groups. We find evidence consistent with one potential explanation for this pattern; reciprocal benchmarking (i.e., firms are more likely to include each other in the disclosed set of peers used to benchmark pay levels). We also find empirical support for three factors contributing to the increase 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 consequences on managerial behavior; it reduces risk-taking by weakening external 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? (December 2020). Available at SSRN: https://ssrn.com/abstract=3753923

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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