Abstract
Critics contend that the use of compensation peer groups has resulted in inflated CEO pay that cannot be justified based on economic fundamentals. We examine this issue using the mandated disclosure of compensation peers that began in 2006. Although firms generally select compensation peers based on characteristics that reflect the labor market for managerial talent, we find evidence that the selected peers are chosen in a manner that biases compensation upward. The bias in peer group selection is unrelated to corporate governance and instead appears to be an institutionalized or structural part of the pay setting process. We provide some preliminary evidence that increased disclosure has reduced the biases in peer group choice.
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