Compensation Peer Groups and Their Relation with CEO Pay

Abstract

ABSTRACT: Using a sample of S&P 1500 firms, we examine the selection of peer groups to set executive compensation. We document that the researcher-defined pool of potential peers significantly influences whether one concludes that the selection of peers is opportunistically biased to increase sample firm pay. With a broad pool of potential peers, opportunism seems more evident but when the potential peers are culled to a group that might better reflect the CEO labor market, selection appears less opportunistic. This finding is reinforced when we examine and find that differences in economic or compensation characteristics are largely unrelated to sample firm pay, even in settings in which we would most expect opportunism.