Abstract
We show that increases in CEO compensation at new S&P 500 members affect CEO compensation at other firms through compensation peer benchmarking. This compensation contagion propagates via three channels. Direct competition for managerial talent forces firms to respond to peers’ pay increases. Star chasing, which involves adding new S&P 500 members to compensation peer groups to justify higher pay, is associated with weak corporate governance. The peer-of-peer channel relies on indirect compensation peers and is most influential overall. Interestingly, we find minimal downward pressure on CEO compensation from companies removed from the S&P 500, confirming the asymmetric nature of contagion.
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