An Evaluation of Compensation Benchmarking Peer Groups Based on Mutual Peer-Designating Behaviors

Abstract

In this paper, I argue that firms mutually recognizing each other as compensation benchmarking peers constitute viable competitors in the same CEO labor market, and that non-mutual peer relationships can serve as a tool to evaluate firms’ executive compensation practices. In particular, I ask why some of the firm’s chosen peers do not consider to select the base firm back despite listing other firms as compensation benchmarking peers. I hypothesize that such one-sided peer choices are driven either by rent extraction or motivational motives. My analyses show that firms with a larger proportion of such one-sided peer choices are associated with higher compensation via setting a higher benchmark level. Consistent with rent extraction motives, such firms are also associated with higher excess compensation and lower firm performance. In additional analyses, I show that the proportion of one-sided peers increases when firms adjust their benchmark level upward by adding higher compensated peers and/or dropping lower compensated peers. Collectively, the findings suggest that patterns in mutual compensation benchmarking peer-designating behaviors can serve as a tool to evaluate firms’ executive compensation practices.