Compensation Peer Groups and Their Relation with CEO Pay

Abstract

We examine whether companies select compensation peer groups opportunistically to increase CEO pay. Using 608 firms from the S&P 1500, 2,154 peer firms identified from their proxy statements, and a pool of potential peers representing the firm’s labor market in which it competes for talent, we find limited evidence that firms choose peer groups opportunistically. Although firms select bigger and better performing peer firms relative to other potential peers, only size has any power in explaining CEO pay. On the other hand, inconsistent with opportunism, sample firms select peers that are more similar to them on other economic characteristics, that use the same compensation consultant and that select the sample firm as a peer. Despite subjecting our analysis to a battery of tests, and even in subsamples where opportunism is more likely at play, we find little support for the conjecture that firms strategically select peer firms to influence greater CEO pay. Our evidence is more consistent with peer firms being used to benchmark CEO pay in a competitive labor market.