We document that firms can effectively retain executives by granting deferred equity pay. We show this by analyzing a unique regulatory change (FAS 123-R) that prompted 723 firms to suddenly eliminate stock option vesting periods. This allowed CEOs to keep 33% more options when departing the firm, and we find that voluntary CEO departure rates subsequently rose from 5% to 21%. Our identification strategy exploits FAS 123-R’s almost-random timing, which was staggered by firms’ fiscal year-ends. Firms that experienced departures suffered negative stock price reactions, and responded by increasing compensation for remaining and newly hired executives.

Abstract We document that firms whose compensation peers experience weak say on pay votes reduce CEO compensation following those votes. Reductions reflect proxy adviser concerns about peers’ compensation contracts and are stronger when CEOs receive excess compensation, when they compete more closely with their weak-vote peers in the executive labor market, and when those peers perform well. Reductions occur following peers’ disclosures of revised pay and are proportional to those needed to retain firms’ relative positions in their peer groups. We conclude that the spillover effects of shareholder voting occur through both learning and compensation targeting channels. (JEL G34, G38, J38, M12, M52) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

ABSTRACT This paper documents a new stylized fact: the cross‐sectional variation in CEO pay levels has declined precipitously in recent years. We offer one explanation for this decline, namely, firms are increasingly benchmarking CEO compensation to industry peers closest in size, thereby creating pay clusters. Our empirical tests provide support for this explanation and suggest that the rise of industry‐size benchmarking is driven by three institutional factors: the mandatory disclosure of compensation peer groups, proxy advisory influence, and say‐on‐pay regulation. Our findings highlight a consequence of adopting a one‐size‐fits‐all standard in the pay‐setting process.