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Keeping up with CEO Jones: Benchmarking and executive compensation

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  • Laschever, Ron A.
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    Abstract

    This paper seeks to understand the role that peer comparisons play in the determination of executive compensation. I exploit a recent change in the Securities and Exchange Commission's regulations that requires firms to disclose the peer companies used for determining the compensation of their top executives. Using a new dataset of S&P 900 companies’ choice of benchmarking firms during two fiscal periods (2007 and 2008), I investigate what determines the choice of comparison firms. I find that companies have a preference for choosing higher-CEO-compensation firms as their benchmark. Though I find that companies prefer to choose as their benchmark peers with similar firm characteristics, for CEO compensation, this effect is countered by a preference for firms with higher-than-own CEO compensation. Using the complete map of firms’ choices, I implement an instrumental variable strategy that uses the characteristics of peers-of-peers to estimate the effect of others’ compensation on own compensation. For Fiscal Year 2007, I find an elasticity of 0.5.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 93 (2013)
    Issue (Month): C ()
    Pages: 78-100

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    Handle: RePEc:eee:jeborg:v:93:y:2013:i:c:p:78-100

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    Web page: http://www.elsevier.com/locate/jebo

    Related research

    Keywords: Executive compensation; Peer effects; Benchmark; CEO;

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