Abstract
Using novel data on explicit compensation benchmarking peer groups, I document that small public firms engage in upward compensation benchmarking to a much greater extent than larger firms. Small firms choose aspirational peers that reflect their executives’ shifting opportunity sets. For these firms, compensation benchmarking is indicative of future growth and performance, and the rate at which pay adjusts toward peer levels is sensitive to executives’ outside employment opportunities. Growing and outperforming small firms strategically use upward benchmarking to adjust pay in an effort to retain valuable managerial talent.
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