Peer benchmarking and CEO compensation: An examination of the community structure of the compensation peer network

Abstract

AbstractResearch Question/IssueThe increase in executive pay has been attracting attention to the practice of peer benchmarking, which is commonly used to determine CEO compensation. Using a network approach, we construct and analyze the compensation peer network and examine how the structure of the network influences CEO pay.Research Findings/InsightsUsing data on public firms in the period between 2006 and 2020, we find that the peer network exhibits strong community structure and that bridging across communities influences CEO pay. Specifically, CEO pay increases by approximately $10 million as the number of bridging ties increases from 30 to 100, which indicates that obfuscation can result in inflated CEO pay and supports the managerial power perspective.Theoretical/Academic ImplicationsWe empirically distinguish the predicted effect of peer benchmarking on CEO pay as outlined in the market for executive talent and the managerial power perspectives. We show that firms may avoid scrutiny and offer high CEO compensation when they either have a very small number of targeted bridging ties or a very large number of diffused, nontargeted bridging ties in the peer network.Practitioner/Policy ImplicationsThe intent of peer benchmarking was to make CEO compensation practices more transparent, legitimate, and functional; however, our findings indicate that these intentions have not been fully realized and instead benchmarking can be used to inflate CEO pay while avoiding stakeholder scrutiny through obfuscation. These insights provide an opportunity to policy makers to be more effective in encouraging additional transparency and stronger justification for boards' choice of peers.