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Abstract
This study provides empirical evidence on the relation between peer group benchmarking in CEO compensation and firm innovation measured by number of patents and citations. Results show that peer group benchmarking and firm innovation are positively related. However, this positive relation holds only for CEOs who receive higher than median peer group compensation. For CEOs who receive lower than median peer group compensation, benchmarking seems to have no statistically significant effect on firm innovation. The study also finds that CEO compensation benchmarked against median peer group compensation is positively related to one-year and five-year stock return volatility. Overall, results suggest that benchmarking in CEO compensation is an efficient response to competitive pressures in CEO talent market and is not driven by an intentional effort by the powerful CEOs to extract rents from their firms.
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