Peer choice in CEO compensation

Albuquerque, Ana M.; Franco, Gus De; Verdi, Rodrigo S.

doi:10.1016/j.jfineco.2012.10.002

Cited by 229 publications

(145 citation statements)

References 48 publications

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“…Consistent with the latter, the choice of highly-paid peers increases in the CEO's tenure (used as a proxy for entrenchment) and the busyness of a …rm's directors (the number of other boards they sit on), and is more prevalent if the CEO is also the chairman (Faulkender and Yang, 2010). In contrast, Albuquerque, Franco, and Verdi (2013) argue that the choice of highly-paid peers is a reward for CEO talent. They …rst calculate the pay di¤erence between actually chosen peers and a group of hypothetical peers matched on …rm characteristics.…”

Section: Peer Groupsmentioning

confidence: 86%

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: 86%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

View full text Add to dashboard Cite

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“…A potential explanation for this trend draws from the way in which companies benchmark the compensation of their CEOs (DiPrete, Eirich, and Pittinsky 2010, Faulkender and Yang 2013, Albuquerque, De Franco, and Verdi 2013, Pittinsky and DiPrete 2013. Compensation benchmarking involves the assembly of a group of peer firms that serves as a lens through which CEO compensation can be evaluated (Barsalou 1983, Podolny 2001, Smith and Chae 2017.…”

Section: Introductionmentioning

confidence: 99%

“…The business media and some academic research Yang 2010, Pittinsky andDiPrete 2013) suggest that companies indeed have a tendency to select larger firms and better paid CEOs into their compensation peer groups. However, recent scholarship has questioned the validity of these claims (Bizjak et al 2008, Albuquerque et al 2013, Cadman and Carter 2013, Kim et al 2015. For example, Albuquerque et al (2013) compare reported peer groups to propensity score matched peer groups and conclude that although CEOs in reported peer groups are more generously compensated, the gap is accounted for by variation in CEO talent.…”

Section: Introductionmentioning

confidence: 99%

“…However, recent scholarship has questioned the validity of these claims (Bizjak et al 2008, Albuquerque et al 2013, Cadman and Carter 2013, Kim et al 2015. For example, Albuquerque et al (2013) compare reported peer groups to propensity score matched peer groups and conclude that although CEOs in reported peer groups are more generously compensated, the gap is accounted for by variation in CEO talent. Cadman and Carter (2013) also reject the claim that peer groups are upwardly biased, but they argue that previous research on compensation benchmarking draws from flawed samples of potential peers.…”

Section: Introductionmentioning

confidence: 99%

“…There are issues, however, that the study by Albuquerque et al (2013) does not address. 5 The first issue is that Albuquerque et al do not explain why firms with especially talented CEOs do not simply select an unbiased peer group and transparently compensate the CEO at a higher percentile.…”

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confidence: 96%

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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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Executives' excess compensation, legitimacy, and environmental information disclosure in Chinese heavily polluting companies: The moderating role of media pressure

Chen

et al. 2018

Corp Soc Responsibility Env

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This study examines whether executives justify their excess compensation through environmental information disclosure using a sample of listed companies in China's heavily polluting industries from 2010 to 2014. We find that executives' excess compensation is positively related to the quality of environmental information disclosure.The above relationship is significant in cases with strong demand for compensation justification (i.e., state-owned enterprises and firms where an internal compensation gap is salient), indicating that executives manipulate environmental information disclosure about their companies according to their purposes. We also find that media pressure weakens the above relationship. A further test affirms a differential influence of media pressure in settings that involve public or private ownership, development of markets, and low or high product market competition. This study reveals a self-serving motive of executives for environmental information disclosure. The findings of this study have practical implications for regulators, shareholders, and managers.

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Peer choice in CEO compensation

Cited by 229 publications

References 48 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

Executives' excess compensation, legitimacy, and environmental information disclosure in Chinese heavily polluting companies: The moderating role of media pressure

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