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Peer Group Choice and Chief Executive Officer Compensation

Author

Listed:
  • Larcker, David F.

    (Graduate School of Business and Rock Center for Corporate Governance, Stanford University)

  • McClure, Charles

    (Booth School of Business, University of Chicago)

  • Zhu, Christina

    (The Wharton School, University of Pennsylvania)

Abstract

We examine the selection of peer groups that boards of directors use when setting the level of CEO compensation. This choice is controversial because it is difficult to ascertain whether peer groups are selected to (i) attract and retain top executive talent or (ii) enable rent extraction by inappropriately increasing CEO compensation. In contrast to prior research, our analysis utilizes the degree to which the observed compensation level of peers in the portfolio is unusual relative to all potential portfolios of peers the board of directors could have reasonably selected. Using a sample of 10,235 firm-year observations from 2008 to 2014, we estimate roughly 33% of board of directors’ choices appear to be associated with rent extraction, whereas the remaining 67% are associated with attracting and retaining high-quality CEO talent. Relative to firms that appear to select peers for aspirational labor market reasons, we find rent extraction firms have more structural governance concerns and realized negative governance outcomes. Over our sample period, we estimate the aggregate excess pay for rent extraction firms is approximately $5.4 billion, or 38% of their total pay.

Suggested Citation

  • Larcker, David F. & McClure, Charles & Zhu, Christina, 2019. "Peer Group Choice and Chief Executive Officer Compensation," Research Papers 3767, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3767
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    Cited by:

    1. Gipper, Brandon, 2021. "The economic effects of expanded compensation disclosures," Journal of Accounting and Economics, Elsevier, vol. 71(1).
    2. Hsu, Yuan-Teng & Huang, Chia-Wei & Koedijk, Kees G., 2023. "Unintended consequences of compensation peer groups on corporate innovation," Journal of Corporate Finance, Elsevier, vol. 78(C).
    3. Jason V. Chen & Kurt H. Gee & Jed J. Neilson, 2021. "Disclosure Prominence and the Quality of Non‐GAAP Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 59(1), pages 163-213, March.
    4. Claudine Salgado & Guilherme Schneider & Cristiano M. Costa, 2022. "Does board interlock affect CEO compensation? Evidence from companies listed in the Brazilian stock exchange," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(4), pages 444-465, December.
    5. Schneider, Thomas Ian, 2021. "Executive compensation and aspirational peer benchmarking," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 121-140.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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