Competitive Pay Policies in CEO Compensation

53 Pages Posted: 17 Apr 2023 Last revised: 25 Apr 2025

See all articles by Mascia Ferrari

Mascia Ferrari

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Dipartimento di Comunicazione ed Economia

Kalash Jain

Columbia University - Columbia Business School

Stephen F. O'Byrne

Shareholder Value Advisors, Inc.

Francesco Reggiani

Free University of Bozen-Bolzano

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Date Written: March 31, 2025

Abstract

CEO equity pay has risen dramatically since 1993, fostering beliefs of increased CEO-shareholder incentive alignment. However, the concurrent rise of “competitive pay policy” (CPP), which benchmarks dollar pay to peers regardless of performance, weakens this link by rewarding poor stock performance with larger share grants and penalizing strong performance with smaller grants. We provide the first large-sample evidence on CPP and document three main findings. First, CPP adoption has grown significantly, and its accelerated adoption is partially driven by SFAS123R, the 2006 rule requiring stock options expensing. Second, while the higher proportion of equity pay increases short-term wealth sensitivity to stock prices, CPP reduces long-term wealth sensitivity by penalizing strong stock performance with smaller future share grants. Third, traditional governance mechanisms fail to address CPP misalignment, as boards and proxy advisors encourage CEO pay with CPP characteristics. These findings challenge assumptions about rising equity pay strengthening incentive alignment.

Keywords: Executive Compensation, Competitive Pay Policy, Peer Benchmarked Compensation, Corporate Governance, Fixed Value Pay, CEO Wealth Sensitivity

JEL Classification: G34, G38, J33, J38, M12, M41, M48

Suggested Citation

Ferrari, Mascia and Jain, Kalash and O'Byrne, Stephen F. and Reggiani, Francesco and Rajgopal, Shivaram, Competitive Pay Policies in CEO Compensation (March 31, 2025). Columbia Business School Research Paper No. 4407139, Available at SSRN: https://ssrn.com/abstract=4407139 or http://dx.doi.org/10.2139/ssrn.4407139

Mascia Ferrari

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Dipartimento di Comunicazione ed Economia ( email )

Viale Allegri, 9
REGGIO EMILIA, RE 42121
Italy

Kalash Jain

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Stephen F. O'Byrne

Shareholder Value Advisors, Inc. ( email )

21 Bonnie Way
Larchmont, NY 10538
United States
914-833-5891 (Phone)

HOME PAGE: http://www.valueadvisors.com/Contact.htm

Francesco Reggiani

Free University of Bozen-Bolzano ( email )

Bozen-Bolzano, 39100
Italy

Shivaram Rajgopal (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

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