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Inside the black box: The role and composition of compensation peer groups

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  • Faulkender, Michael
  • Yang, Jun
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    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.

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    Bibliographic Info

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

    Volume (Year): 96 (2010)
    Issue (Month): 2 (May)
    Pages: 257-270

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    Handle: RePEc:eee:jfinec:v:96:y:2010:i:2:p:257-270

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

    Related research

    Keywords: Executive compensation Peer groups Benchmarking;

    References

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    1. Alex Edmans & Xavier Gabaix & Augustin Landier, 2009. "A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4881-4917, December.
    2. Harry A. Newman & Haim A. Mozes, 1999. "Does the Composition of the Compensation Committee Influence CEO Compensation Practices?," Financial Management, Financial Management Association, vol. 28(3), Fall.
    3. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    4. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
    5. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
    6. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are Ceos Rewarded For Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 901-932, August.
    7. 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.
    8. Anderson, Ronald C. & Bizjak, John M., 2003. "An empirical examination of the role of the CEO and the compensation committee in structuring executive pay," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1323-1348, July.
    9. Paul Oyer, 2004. "Why Do Firms Use Incentives That Have No Incentive Effects?," Journal of Finance, American Finance Association, vol. 59(4), pages 1619-1650, 08.
    10. Bebchuk, Lucian Arye & Fried, Jesse, 2003. "Executive Compensation as an Agency Problem," CEPR Discussion Papers 3961, C.E.P.R. Discussion Papers.
    11. 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.
    12. Lewellen, Wilbur G. & Park, Taewoo & Ro, Byung T., 1996. "Self-serving behavior in managers' discretionary information disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 227-251, April.
    13. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    14. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1995. "The CEO, the Board of Directors and Executive Compensation: Economic and Psychological Perspectives," Industrial and Corporate Change, Oxford University Press, vol. 4(2), pages 293-332.
    15. Eliezer M. Fich & Anil Shivdasani, 2006. "Are Busy Boards Effective Monitors?," Journal of Finance, American Finance Association, vol. 61(2), pages 689-724, 04.
    16. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    17. 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.
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    Cited by:
    1. Francis, Bill & Hasan, Iftekhar & John, Kose & Waisman , Maya, 2012. "Urban agglomeration and CEO compensation," Research Discussion Papers 17/2012, Bank of Finland.
    2. 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.
    3. Kini, Omesh & Williams, Ryan, 2012. "Tournament incentives, firm risk, and corporate policies," Journal of Financial Economics, Elsevier, vol. 103(2), pages 350-376.
    4. Giannetti, Mariassunta, 2011. "Serial CEO incentives and the structure of managerial contracts," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 633-662, October.
    5. Bizjak, John & Lemmon, Michael & Nguyen, Thanh, 2011. "Are all CEOs above average? An empirical analysis of compensation peer groups and pay design," Journal of Financial Economics, Elsevier, vol. 100(3), pages 538-555, June.
    6. 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).
    7. Armstrong, Christopher S. & Ittner, Christopher D. & Larcker, David F., 2010. "Corporate Governance, Compensation Consultants, and CEO Pay Levels," Research Papers 2068, Stanford University, Graduate School of Business.
    8. Sandip Dhole & Saleha B Khumawala & Sagarika Mishra & Tharindra Ranasinghe, . "Executive Compensation and Regulation Imposed Corporate Governance: Evidence from the California Non-Profit Integrity Act (2004)," Financial Econometics Series 2012_11, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    9. Taekjin Shin, 2012. "CEO Compensation and Shareholder Value Orientation Among Large US Firms," The Economic and Social Review, Economic and Social Studies, vol. 43(4), pages 535-559.
    10. 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.
    11. Liljeblom, Eva & Pasternack, Daniel & Rosenberg, Matts, 2011. "What determines stock option contract design?," Journal of Financial Economics, Elsevier, vol. 102(2), pages 293-316.

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