Peer Group Choice and Chief Executive Officer Compensation

David F. Larcker, Charles McClure and Christina Zhu
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David F. Larcker: Graduate School of Business and Rock Center for Corporate Governance, Stanford University
Charles McClure: Booth School of Business, University of Chicago
Christina Zhu: The Wharton School, University of Pennsylvania

Research Papers from Stanford University, Graduate School of Business

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.

JEL-codes: G30 J33 M12 M52 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-cfn and nep-hrm
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Citations: View citations in EconPapers (6)

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