Peer-Group Choice, Chief Executive Officer Compensation, and Firm Performance

61 Pages Posted: 13 Feb 2019 Last revised: 19 Feb 2021

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Charles McClure

University of Chicago Booth School of Business

Christina Zhu

University of Pennsylvania - The Wharton School

Date Written: February 17, 2021

Abstract

We examine the selection of peer groups that boards of directors use when setting CEO compensation. The challenge is to ascertain whether peer groups are selected to (i) attract and retain executive talent and/or (ii) enable rent extraction by inappropriately increasing compensation. We find that the inferences in prior research are based on questionable methodological choices and do not generalize with an expanded sample. After addressing these concerns, we find that, on average, excess peer compensation has a negative association with future firm operating performance. However, significant variation in CEO talent and corporate governance exists within the cross-section of firms. The negative association between excess peer compensation and future performance is mitigated when the firm has a high level of CEO talent, and exacerbated when the firm has low-quality corporate governance. Thus, the economic consequences of peer-group choice are highly contextual. In general, we find that talent motivations explain more of the variation in the future performance implications of peer-group choice than corporate governance.

Keywords: CEO Compensation; Peer Groups; Agency Problems; CEO Labor Market

JEL Classification: M12; M52; G30; J33

Suggested Citation

Larcker, David F. and McClure, Charles and Zhu, Christina, Peer-Group Choice, Chief Executive Officer Compensation, and Firm Performance (February 17, 2021). Rock Center for Corporate Governance at Stanford University Working Paper No. 240, Stanford University Graduate School of Business Research Paper No. 19-15, Available at SSRN: https://ssrn.com/abstract=3333874 or http://dx.doi.org/10.2139/ssrn.3333874

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
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650-725-6159 (Phone)

European Corporate Governance Institute (ECGI) ( email )

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Belgium

Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

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Stanford, CA 94305-8610
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Charles McClure

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Christina Zhu (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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