Why Small Firms Peg Executive Compensation to Rivals’ Higher Pay

In recent years, executive compensation in the U.S. has become a hotly debated issue. A central point of contention is peer benchmarking, an integral part of the pay-setting process in which firms compare their executives’ compensation with that of rivals in the labor market.  Proponents of this practice claim that compensation benchmarking is an efficient mechanism used to gauge market wages within a competitive labor market, while detractors allege that it inflates pay because firms may arbitrarily select peers with generously remunerated executives.

In a recent paper, I study the dynamics of compensation benchmarking using a comprehensive, hand-collected dataset of … Read more