Journal of Financial Economics Vol. 108 No. 1 2013

Peer choice in CEO compensation

Ana M. Albuquerque^1,2; Gus De Franco; Rodrigo S. Verdi³

¹ Boston University · ² Universidade Católica Portuguesa · ³ Massachusetts Institute of Technology

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.

DOI

10.1016/j.jfineco.2012.10.002

Volume

108

Issue

1

Pages

160-181

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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