Working Paper: CEPR ID: DP15523
Authors: Gaizka Ormazabal; Torsten Jochem; Anjana Rajamani
Abstract: We document that, over the last decade, the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within industry and industry-size groups. We find evidence consistent with one potential explanation for this pattern; reciprocal benchmarking (i.e., firms are more likely to include each other in the disclosed set of peers used to benchmark pay levels). We also find empirical support for three factors contributing to the increase in reciprocal benchmarking; the mandatory disclosure of compensation peer groups, say on pay, and proxy advisory influence. Finally, we find that reciprocal benchmarking has meaningful consequences on managerial behavior; it reduces risk-taking by weakening external tournament incentives.
Keywords: clustering of executive pay; pay diversity; competitive benchmarking; pay transparency; pay disclosure; tournament incentives
JEL Codes: G3; G34; G38; M12; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decreased pay variation among CEOs (M12) | adverse effect on managerial incentives (M52) |
| reciprocal benchmarking (O36) | less pay variation (J31) |
| pay variation (J33) | future firm performance (realized equity return volatility) (G17) |
| reciprocal benchmarking (O36) | decreased pay variation among CEOs (M12) |
| mandatory disclosure of compensation peer groups (M12) | increased reciprocal benchmarking (O36) |
| say on pay regulations (G38) | increased reciprocal benchmarking (O36) |
| influence of proxy advisors (G34) | increased reciprocal benchmarking (O36) |