Peer choice in CEO compensation

Author(s)
Albuquerque, Ana M.; De Franco, Gus; Verdi, Rodrigo
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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.
Date issued
2012-10
URI
http://hdl.handle.net/1721.1/108605
Department
Sloan School of Management
Journal
Journal of Financial Economics
Publisher
Elsevier
Citation
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.
Version: Author's final manuscript
ISSN
0304-405X
1879-2774
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