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

Bizjak, John M.; Lemmon, Michael L.; Nguyen, Tuyen

doi:10.1016/j.jfineco.2011.02.007

Cited by 255 publications

(125 citation statements)

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“…Even though peers appear to be selected mainly based on sensible criteria (e.g., of similar size and in the same industry), there is evidence that some …rms are opportunistic and choose highly-paid peers (Faulkender and Yang, 2010;Bizjak, Lemmon, and Nguyen, 2011). There is some disagreement about the exact mechanism -Faulkender and Yang (2010) argue that …rms choose peers with unusually high pay given their characteristics, while Bizjak, Lemmon, and Nguyen (2011) argue that …rms tend to choose larger peers that pay more to due to their size. Both studies agree that the choice of peer group predicts pay: controlling for …rm and CEO characteristics, the median pay across peer …rms has additional explanatory power.…”

Section: Peer Groupsmentioning

confidence: 99%

“…CEOs appear to be rewarded simply for the act of undertaking an acquisition, regardless of whether the acquisition creates value for shareholders. CEO pay tends to increase after bank mergers, even if the acquirer's stock price declines (Bliss and Rosen, 2001). Across all industries, acquirer CEOs receive cash bonuses for deal completion, and these bonuses are unrelated to the acquirer's deal announcement return, but positively related to deal size and measures of CEO power (Grinstein and Hribar, 2004).…”

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confidence: 99%

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Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research. JEL-Codes: D310, D860, G340, M120. Terms of use: Documents in

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Section: Peer Groupsmentioning

confidence: 99%

mentioning

confidence: 99%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

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“…Prior work mostly relied on propensity score matching (PSM) to construct counterfactual peer groups (Faulkender and Yang 2010, Bizjak et al 2011, Faulkender and Yang 2013, Albuquerque et al 2013. These studies create a risk set of potential peers for each selecting firm, leading to N (number of selecting firms) * M (number of firms in the pool of potential peers) observations.…”

Section: Determining the Peer Pay Gapmentioning

confidence: 99%

Obscured transparency? Compensation benchmarking and the biasing of executive pay

Vaan¹,

Elbers²,

DiPrete³

2018

Preprint

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The disclosure of compensation peer groups is argued to provide shareholders with valuable information that can be used to scrutinize CEO compensation. However, research suggests that there are substantial incentives for executives and directors to bias the compensation peer group upward such that the CEO can extract additional rent. We leverage the idea that reciprocated peer nominations are unlikely to be biased in order to construct counterfactual peer groups that allow us to measure the bias of disclosed peer groups.Analyses of eleven years of comprehensive data on compensation peer groups demonstrate that the average firm uses an upwardly biased peer group. The size of the bias increases when incentives and opportunities to do so are more pronounced. Specifically, results show that bias is larger when financial targets are not met and when exercising discretion in the selection of peer firms is justifiable. More importantly, upward bias in compensation peer groups is highly predictive of an increase in CEO compensation -suggesting that there is a strong incentive for CEOs to strategically select peers. Finally, while average peer group bias has gone down in recent years, the predictive effect of bias on pay has gone up. These findings call into question the practical impact of recent efforts to introduce greater transparency into the process for determining executive compensation.

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“…Those rules required the disclosure of compensation consultants, which has potentially affected the incentives of a key player in the pay-setting process (Murphy and Sandino, 2010;Cadman et al, 2010). They also required the disclosure of peers used for benchmarking compensation, another key driver of pay levels (Faulkender and Yang, 2013;Albuquerque et al, forth;and Bizjak et al, 2011). Moreover, after the Enron-type scandals and the burst of the dotcom bubble, there has been a 'change in sentiment' over the usefulness of option-based pay -also related to the option backdating scandal -and an increase in compensation-related shareholder activism through shareholder proposals and vote-no campaigns against compensation committee members (Ertimur et al, 2011).…”

mentioning

confidence: 99%

CEO Pay and Firm Size: an Update after the Crisis

Gabaix

Landier

Sauvagnat

2013

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In the 'size of stakes' view quantitatively formalised in Gabaix and Landier (2008) Executive compensation remains very much at the center-stage of academic and policy debates. A relative lack of consensus seems to prevail regarding the origins of the large rise of executive compensation observed in the US since the 70s. According to some scholars (see e.g. Bebchuck and Fried (2004) for a summary of this view), rising compensation is due to a higher ability of CEOs to extract rents from shareholders, e.g. by capturing their board (Shivdasani and Yermack, 1999) or appointing compensation consultants that cater to their interests (Murphy and Sandino, 2010). Hermalin (2005) argues instead that the rise in CEO pay reflects tighter corporate governance: pay increases to compensate CEOs for the greater risk of being fired. Others argue that the very function of CEOs has changed over time: they are now more often poached from outside firms than before (Murphy and Zabojnik, 2004;Frydman, 2005); shareholders have become more convinced of the importance of financial incentives (Jensen et al., 2004). By contrast, Gabaix and Landier (2008, henceforth GL) argue that the bulk of variations in CEO compensation across time and across companies can be explained as the result of competitive market forces. They show that under fairly general assumptions, in a market,

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

Cited by 255 publications

References 13 publications

Executive Compensation: A Survey of Theory and Evidence

Executive Compensation: A Survey of Theory and Evidence

Obscured transparency? Compensation benchmarking and the biasing of executive pay

CEO Pay and Firm Size: an Update after the Crisis

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