The Effect of Organizational Atypicality on Reference Group Selection and Performance Evaluation

Smith, Edward B.; Chae, Heewon

doi:10.1287/orsc.2017.1154

Cited by 29 publications

(30 citation statements)

References 60 publications

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“…Another series of studies found that atypical firms receive higher rewards for good performance and less punishment for poor performance (Smith 2011) in part because their performance is evaluated against a different benchmark, making good performance appear better and poor performance appear merely mediocre (Smith and Chae 2017). Meanwhile, firms perceived as presenting a higher liability risk because they were targeted by shareholder activists experienced a decrease in their market value despite having the same environmental performance as their peers (Vasi and King 2012).…”

Section: Social Performance Ratings and Firm Preferencesmentioning

confidence: 99%

Women Don’t Mean Business? Gender Penalty in Board Composition

Solal

Snellman

2019

Organization Science

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We examine investor responses to board diversity and highlight a previously unexplored mechanism to explain negative market reactions to senior female appointments. Drawing on signaling theory, we propose that an increase in board diversity leads investors to update their beliefs about firm preferences. Specifically, we argue that a gender-diverse board is interpreted as revealing a preference for diversity and a weaker commitment to shareholder value. Consequently, firms with more female directors will be penalized. We test our argument using 14 years of panel data on U.S. public firms. We find that firms that increase board diversity suffer a decrease in market value and that this effect is amplified for firms that have received higher ratings for their diversity practices across the organization. These results suggest that observers respond to the presence of female leaders not simply on their own merit but as broader cues of firm preferences and that firms may counteract any potential signaling effect through careful framing.

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Section: Social Performance Ratings and Firm Preferencesmentioning

confidence: 99%

Women Don’t Mean Business? Gender Penalty in Board Composition

Solal

Snellman

2019

Organization Science

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“…Research on social comparisons suggests that there should be variation in the tendency to benchmark against similar others (Festinger 1954, Audia et al 2016, Smith and Chae 2017 there are differences in incentives and opportunities to select dissimilar comparison peers. Building on this research, we propose that weak performance on the metrics that affect CEO compensation creates an incentive to bias the peer group upward, while ambiguity in the set of firms most similar to the focal firm creates an opportunity to do so.…”

Section: Peer Group Bias: Incentives and Opportunitiesmentioning

confidence: 99%

“…Compensation benchmarking involves the assembly of a group of peer firms that serves as a lens through which CEO compensation can be evaluated (Barsalou 1983, Podolny 2001, Smith and Chae 2017. The Securities and Exchange Commission (SEC) made disclosure of these peer groups mandatory in 2007.…”

Section: Introductionmentioning

confidence: 99%

Obscured transparency? Compensation benchmarking and the biasing of executive pay

Vaan¹,

Elbers²,

DiPrete³

2018

Preprint

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The disclosure of compensation peer groups is argued to provide shareholders with valuable information that can be used to scrutinize CEO compensation. However, research suggests that there are substantial incentives for executives and directors to bias the compensation peer group upward such that the CEO can extract additional rent. We leverage the idea that reciprocated peer nominations are unlikely to be biased in order to construct counterfactual peer groups that allow us to measure the bias of disclosed peer groups.Analyses of eleven years of comprehensive data on compensation peer groups demonstrate that the average firm uses an upwardly biased peer group. The size of the bias increases when incentives and opportunities to do so are more pronounced. Specifically, results show that bias is larger when financial targets are not met and when exercising discretion in the selection of peer firms is justifiable. More importantly, upward bias in compensation peer groups is highly predictive of an increase in CEO compensation -suggesting that there is a strong incentive for CEOs to strategically select peers. Finally, while average peer group bias has gone down in recent years, the predictive effect of bias on pay has gone up. These findings call into question the practical impact of recent efforts to introduce greater transparency into the process for determining executive compensation.

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“…A potential explanation for this trend draws from the way in which companies benchmark the compensation of their CEOs (DiPrete, Eirich, and Pittinsky 2010, Faulkender and Yang 2013, Albuquerque, De Franco, and Verdi 2013, Pittinsky and DiPrete 2013. Compensation benchmarking involves the assembly of a group of peer firms that serves as a lens through which CEO compensation can be evaluated (Barsalou 1983, Podolny 2001, Smith and Chae 2017. The Securities and Exchange Commission (SEC) made disclosure of these peer groups mandatory in 2007.…”

Section: Introductionmentioning

confidence: 99%

“…We then examine the conditions under which peer group bias should be most pronounced. We draw from research on social comparisons (Audia et al 2016, Smith andChae 2017) and predict that peer group bias should increase when the firm fails to meet its financial targets and when firms can exercise benchmarking discretion as a result of ambiguity about the set of firms that are most similar to the focal firm, i.e. its "natural" or "counterfactual" peers.…”

Section: Introductionmentioning

confidence: 99%

Obscured Transparency? Compensation Benchmarking and the Biasing of Executive Pay

2018

View full text Add to dashboard Cite

The disclosure of compensation peer groups is argued to provide shareholders with valuable information that can be used to scrutinize CEO compensation. However, research suggests that there are substantial incentives for executives and directors to bias the compensation peer group upward such that the CEO can extract additional rent. We leverage the idea that reciprocated peer nominations are unlikely to be biased in order to construct counterfactual peer groups that allow us to measure the bias of disclosed peer groups. Analyses of eleven years of comprehensive data on compensation peer groups demonstrate that the average firm uses an upwardly biased peer group. The size of the bias increases when incentives and opportunities to do so are more pronounced. Specifically, results show that bias is larger when financial targets are not met and when exercising discretion in the selection of peer firms is justifiable. More importantly, upward bias in compensation peer groups is highly predictive of an increase in CEO compensation-suggesting that there is a strong incentive for CEOs to strategically select peers. Finally, while average peer group bias has gone down in recent years, the predictive effect of bias on pay has gone up. These findings call into question the practical impact of recent efforts to introduce greater transparency into the process for determining executive compensation.

show abstract

The Effect of Organizational Atypicality on Reference Group Selection and Performance Evaluation

Cited by 29 publications

References 60 publications

Women Don’t Mean Business? Gender Penalty in Board Composition

Women Don’t Mean Business? Gender Penalty in Board Composition

Obscured transparency? Compensation benchmarking and the biasing of executive pay

Obscured Transparency? Compensation Benchmarking and the Biasing of Executive Pay

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