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Peer choice in CEO compensation

Author

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

Abstract

Current research shows that firms are more likely to benchmark against peers that pay their Chief Executive Officers (CEOs) higher compensation, reflecting self serving behavior. We propose an alternative explanation: the choice of highly paid peers represents a reward for unobserved CEO talent. We test this hypothesis by decomposing the effect of peer selection into talent and self serving components. Consistent with our prediction, we find that the association between a firm's selection of highly paid peers and CEO pay mostly represents compensation for CEO talent.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jfinec:v:108:y:2013:i:1:p:160-181
    DOI: 10.1016/j.jfineco.2012.10.002
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    More about this item

    Keywords

    Executive compensation; Benchmarking; Peer groups;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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