Does the use of peer groups contribute to higher pay and less efficient compensation?☆

Bizjak, John M.; Lemmon, Michael L.; Naveen, Lalitha

doi:10.1016/j.jfineco.2007.08.007

Cited by 444 publications

(286 citation statements)

References 22 publications

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“…Like the House report, the Corporate Library study does not consider differences in corporate governance environment, excludes some pay elements, and only controls for a small number of economic factors that prior research has shown to be important in explaining the level of executive compensation. Bizjak et al (2007) and Faulkender and Yang (2007) examine whether peer groups are selectively chosen by companies with weak governance to extract excess pay, with differing conclusions. While Bizjak et al (2007) conclude that peer-group benchmarking is related more to economic factors than to weak governance, Faulkender and Yang (2007) conclude that CEOs of companies with weak governance choose peer group compositions that generate higher compensation.…”

Section: Related Researchmentioning

confidence: 99%

“…Bizjak et al (2007) and Faulkender and Yang (2007) examine whether peer groups are selectively chosen by companies with weak governance to extract excess pay, with differing conclusions. While Bizjak et al (2007) conclude that peer-group benchmarking is related more to economic factors than to weak governance, Faulkender and Yang (2007) conclude that CEOs of companies with weak governance choose peer group compositions that generate higher compensation. Neither study examines the role of compensation consultants in the choice of peer groups.…”

Section: Related Researchmentioning

confidence: 99%

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Corporate governance, compensation consultants, and CEO pay levels

2012

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This study investigates the relation between corporate governance and CEO pay levels and the extent to which the higher pay found in firms using compensation consultants is related to governance differences. Using proxy statement disclosures from 2,110 companies, we find that CEO pay is higher in firms with weaker governance and that firms with weaker governance are more likely to use compensation consultants. CEO pay remains higher in clients of consulting firms even after controlling for economic determinants of compensation. However, when consultant users and non-users are matched on both economic and governance characteristics, differences in pay levels are not statistically significant, indicating that governance differences explain much of the higher pay in clients of compensation consultants. We find no support for claims that CEO pay is higher in potentially "conflicted" consultants that also offer additional noncompensation-related services. Abstract: This study investigates the relation between the use of compensation consultants and CEO pay levels. Using new proxy statement disclosures from 2,116 companies, we examine claims that pay is higher in clients of compensation consultants, and test whether any pay differences in users and non-users of consultants are due to differences in economic or corporate governance characteristics. We find that CEO pay is generally higher in clients of most consulting firms, even after controlling for economic determinants of compensation. However, when users and non-users are matched on both economic and governance characteristics, differences in pay levels are not statistically significant. These results are consistent with claims that compensation consultants provide a mechanism for CEOs of companies with weak governance to extract and justify excess pay. Finally, we find no support for claims that CEO pay is higher in "conflicted" consultants that also offer additional non-compensation related services.

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Section: Related Researchmentioning

confidence: 99%

Section: Related Researchmentioning

confidence: 99%

Corporate governance, compensation consultants, and CEO pay levels

2012

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“…Gabaix and Landier (2008) predict that the 55 These regressions also control for year indicators, industry, firm size, recent firm performance, noisiness in the performance measure, investment opportunities, leverage, and managerial job titles. 56 Another example related to governance is the growing use of compensation consultants and industry surveys of executive pay, which might have boosted the level of compensation through a "ratcheting effect," (Murphy, 1999;Bizjak, Lemmon and Naveen, 2008). However, compensation consultants may have played a role in determining executive pay as early as the 1950s, much earlier than the increase in the level of compensation.…”

Section: Re-assessing Theories For the Evolution Of Executive Paymentioning

confidence: 99%

Executive Compensation

2011

Nonprofit Law for Colleges and Universities

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“…Thus, larger firms are likely to have higher levels of outside director compensation and more equity based compensation (e.g., Bryan et al, 2000;Ryan and Wiggins, 2004). Our proxy for firm size is sales revenue, and we use log of sales to minimize the effects of extreme values (e.g., Bizjak et al, 2007;Fich and Shivdasani, 2005). Linn and Park (2005) find that the structure of director compensation depends on the growth opportunities of the firm.…”

Section: Predicting a Firm's Market Level Of Director Compensationmentioning

confidence: 99%

How do firms adjust director compensation?

Farrell

Friesen

Hersch

2008

Journal of Corporate Finance

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This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998-2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.

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Does the use of peer groups contribute to higher pay and less efficient compensation?☆

Cited by 444 publications

References 22 publications

Corporate governance, compensation consultants, and CEO pay levels

Corporate governance, compensation consultants, and CEO pay levels

Executive Compensation

How do firms adjust director compensation?

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