Has the Use of Peer Groups Contributed to Higher Levels of Executive Compensation?

Management Fashion Pay-for-Performance for CEOs

“…Pay below the 50th percentile is often labelled "below market", while pay above the 50th is percentile considered "competitive". As a consequence an "elevator" effect in executive pay levels sets in (O'Reilly et al (1988); Ezzamel and Watson (1998); Bizjak et al (2000)). The correlation between firm size and executive pay is turned into a causal mechanism that rewards managers for increasing the size of the firms, even though they may destroy value in doing so (Tosi et al (2000); Jensen et al (2004)) 11 .…”

Compensation Consultants and Executive Pay

“…However, since there are no requirements for firms to mention that compensation consultants are used for setting pay in US firms this figure is likely to be biased downwards. 8 In addition, Bizjak et al (2000) are unable to identify the name of the compensation consultant, who hires the consultant, or whether other services are supplied to the firm in addition to pay advice etc. For these reasons, the authors do not test directly whether compensation consultants have an impact on CEO pay.…”

“…For these reasons, the authors do not test directly whether compensation consultants have an impact on CEO pay. However, Bizjak et al (2000) document important evidence of social comparisons or peer effects when pay is set.…”

“…In addition to this, management typically hires an external compensation consultant who supplies expert information to the firm and the compensation committee (Murphy, 1999, Bizjak et al, 2000.…”

“…1 The compensation committee is called a remuneration committee in the United Kingdom. Bizjak et al (2000) look at the effect of peer comparisons on CEO pay. They found that 65% of firms referred to consultants in proxy statements, attesting to their importance in the pay setting process.…”