Reaching for the ‘Stars’ in CEO Compensation

Abstract

Does CEO compensation at highly central firms (‘stars’) in compensation peer networks influence pay at lower-profile, peripheral firms? We propose and find support for “reaching for the stars” hypothesis. We find that many agency-prone, lower-profile firms covertly tie CEO compensation to that of influential ‘stars’. Stronger governance and reputable compensation-consultants moderate these effects. Star-driven pay effects are asymmetric, evident only when star-pay increases. Shareholder/proxy-advisor response to star-driven excess-pay is muted, possibly because star-pay effects are correlated across firms and CEO-pay is typically judged relative to peers. Evidence suggests reaching-for-the-stars contributes to rapid increase in CEO-pay at smaller, less-visible firms.

Keywords: Executive pay, CEO compensation, CEO compensation benchmarking, star compensation peers, star-driven pay