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Keeping up with CEO Jones: Benchmarking and executive compensation

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  • Laschever, Ron A.

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.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jeborg:v:93:y:2013:i:c:p:78-100
    DOI: 10.1016/j.jebo.2013.07.002
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    More about this item

    Keywords

    Executive compensation; Peer effects; Benchmark; CEO;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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