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Inside the Black Box: The Role and Composition of Compensation Peer Groups

36 Pages Posted: 21 Mar 2007 Last revised: 14 May 2014

Michael W. Faulkender

University of Maryland - Robert H. Smith School of Business

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 1, 2010

Abstract

This paper considers the features of the newly disclosed compensation peer groups and demonstrates their significant role in explaining variations in chief executive officer (CEO) compensation beyond that of other benchmarks such as the industry-size peers. After controlling for industry, size, visibility, CEO responsibility, and talent flows, we find that firms appear to select highly paid peers to justify their CEO compensation and this effect is stronger in firms where the compensation peer group is smaller, where the CEO is the chairman of the board of directors, where the CEO has longer tenure, and where directors are busier serving on multiple boards.

Keywords: Corproate Governance, Executive Compensation, Compensation Peer Groups

JEL Classification: G34, J33

Suggested Citation

Faulkender, Michael W. and Yang, Jun, Inside the Black Box: The Role and Composition of Compensation Peer Groups (May 1, 2010). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972197 or http://dx.doi.org/10.2139/ssrn.972197

Michael W. Faulkender

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Jun Yang (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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