Abstract
We find that director pay, especially the equity-based portion, is positively related to peer firms' director pay, suggesting boards benchmark when establishing their own compensation. Such benchmarking is distinct from peer benchmarking in CEO pay. We also find a significant bias in peer selection towards peers with relatively high director pay, which helps increase board pay. Peer benchmarking of director compensation is more (less) pronounced in firms with low (high) involvement by institutional investors and firms with declining (increasing) profitability. Overall, our results are consistent with directors engaging in self-dealing when selecting compensation peers, without clear benefits to the firm.
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