Peer choice in CEO compensation
Author(s)Albuquerque, Ana M.; De Franco, Gus; Verdi, Rodrigo
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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.
DepartmentSloan School of Management
Journal of Financial Economics
Albuquerque, Ana M.; De Franco, Gus and Verdi, Rodrigo S. “Peer Choice in CEO Compensation.” Journal of Financial Economics 108, no. 1 (April 2013): 160–181. © 2012 Elsevier B.V.
Author's final manuscript