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Are all CEOs above average? An empirical analysis of compensation peer groups and pay design

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  • Bizjak, John
  • Lemmon, Michael
  • Nguyen, Thanh
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    Abstract

    Companies can potentially use compensation peer groups to inflate pay by choosing peers that are larger, choosing a high target pay percentile, or choosing peer firms with high pay. Although peers are largely selected based on characteristics that reflect the labor market for managerial talent, we find that peer groups are constructed in a manner that biases compensation upward, particularly in firms outside the Standard & Poor's (S&P) 500. Pay increases close only about one-third of the gap between the pay of the Chief Executive Officer (CEO) and the peer group, however, suggesting that boards exercise discretion in adjusting compensation. Preliminary evidence suggests that increased disclosure has reduced the biases in peer group choice.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 100 (2011)
    Issue (Month): 3 (June)
    Pages: 538-555

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    Handle: RePEc:eee:jfinec:v:100:y:2011:i:3:p:538-555

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Executive compensation Benchmarking Peer groups CEO pay;

    References

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    1. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
    2. Hayes, Rachel M. & Schaefer, Scott, 2009. "CEO pay and the Lake Wobegon Effect," Journal of Financial Economics, Elsevier, vol. 94(2), pages 280-290, November.
    3. Bengt Holmstrom & Steven N. Kaplan, 2003. "The State Of U.S. Corporate Governance: What'S Right And What'S Wrong?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 8-20.
    4. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2001. "Corporate Governance and Equity Prices," NBER Working Papers 8449, National Bureau of Economic Research, Inc.
    5. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    6. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    7. Fan, Joseph P H & Lang, Larry H P, 2000. "The Measurement of Relatedness: An Application to Corporate Diversification," The Journal of Business, University of Chicago Press, vol. 73(4), pages 629-60, October.
    8. Cadman, Brian & Carter, Mary Ellen & Hillegeist, Stephen, 2010. "The incentives of compensation consultants and CEO pay," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 263-280, April.
    9. Faulkender, Michael & Yang, Jun, 2010. "Inside the black box: The role and composition of compensation peer groups," Journal of Financial Economics, Elsevier, vol. 96(2), pages 257-270, May.
    10. Bizjak, John M. & Lemmon, Michael L. & Naveen, Lalitha, 2008. "Does the use of peer groups contribute to higher pay and less efficient compensation?," Journal of Financial Economics, Elsevier, vol. 90(2), pages 152-168, November.
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    Cited by:
    1. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
    2. Cheng-Feng Cheng, 2012. "Evaluate the Effectiveness of Manager Compensation," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 25-44, June.
    3. Laschever, Ron A., 2013. "Keeping up with CEO Jones: Benchmarking and executive compensation," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 78-100.
    4. Werner, Peter & Bolton, Gary & Ockenfels, Axel, 2013. "How managerial wage transparency may reduce shareholder returns Evidence from an experiment," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79766, Verein für Socialpolitik / German Economic Association.
    5. Janto Haman & Hristos Doucouliagos & Michael Graham, 2012. "Agency Problem II and Convergence in CEO Pay," Economics Series 2012_5, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    6. Brookman, Jeffrey T. & Thistle, Paul D., 2013. "Managerial compensation: Luck, skill or labor markets?," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 252-268.
    7. Andres, Christian & Fernau, Erik & Theissen, Erik, 2013. "Should I stay or should I go? Former CEOs as monitors," CFR Working Papers 12-02 [rev.], University of Cologne, Centre for Financial Research (CFR).
    8. Hristos Doucouliagos & Michael Graham & Janto Haman, 2012. "Dynamics and Convergence in Chief Executive Officer Pay," Economics Series 2012_3, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    9. Josh Bivens & Lawrence Mishel, 2013. "The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 57-78, Summer.
    10. Bereskin, Frederick L. & Cicero, David C., 2013. "CEO compensation contagion: Evidence from an exogenous shock," Journal of Financial Economics, Elsevier, vol. 107(2), pages 477-493.

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