Strategic Peer Group Choice: Evidence from Mutual Peer-Designating Behavior

• In Event: Factors Influencing Executive Compensation

Abstract

In this paper, I provide evidence that firms deliberately choose CEO compensation benchmarking peer groups in order to amplify the CEOs’ compensation packages. In particular, given the salience of and the high level of attention drawn to the set of actually selected firms into a firm’s peer group, I highlight the possibility that when firms engage in strategic peer group choice, it is through the omission of peers, rather than through the selection of peers. I identify two different types of peers: mutual and one-sided peers. Mutual peers are firms that mutually list each other as peers whereas one-sided peers are either (1) the peers that do not select the base firm as their peer (one-sided-selected peers) or (2) the firms that select the base firm as their peer, but the base firm omits from their list of peers (one-sided-omitted peers). I show that the number of one-sided peers, primarily one-sided-omitted peers, can provide meaningful signals regarding whether a firm is engaging in opportunistic peer choice behavior to increase the level of CEO compensation. I also show that investors can exploit such informational content of firms’ disclosed peer groups to create valuable investment strategies.

Author

• Jee-Eun Shin, Harvard University Business School