Setting Executive Pay: Bias in the Change of Compensation Peer Groups

• In Event: 026 - Regular Session. Economic Sociology: Categories, Category Combination, and Evaluation in Markets

Abstract

This paper studies the process through which the composition of compensation peer groups, used by US corporations to set executive pay, has changed since the Securities and Exchange Commission (SEC) implemented its peer group disclosure rule in 2006. The results of the study indicate that changes in peer groups shift the compensation distribution of the peer group to the right, creating additional leverage for CEOs to negotiate higher compensation. Recent work in the bias of peer groups argues that compensation bias may reflect unobserved talent variation and rejects the idea that peer groups are biased to serve the interests of the CEO. By accounting for labor mobility and building on the argument that talent is a durable characteristic of the individual, we show that it is unlikely that compensation bias in the addition and removal of peers can be explained by unobserved talent variations. Our work builds on a newly created longitudinal database of the compensation peers reported annually by more than 1000 unique firms since 2006. This paper contributes to the increasing literature in sociology about processes of evaluation.

Author

• Mathijs de Vaan, Columbia University