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Discussion Paper Details

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Title: Why Have CEO Pay Levels Become Less Diverse?

Author(s): Torsten Jochem, Gaizka Ormazabal and Anjana Rajamani

Publication Date: December 2020

Keyword(s): Clustering of executive pay, competitive benchmarking, pay disclosure, pay diversity, pay transparency and tournament incentives

Programme Area(s): Financial Economics

Abstract: We document that, over the last decade, the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within industry and industry-size groups. We �?nd evidence consistent with one potential explanation for this pattern; reciprocal benchmarking (i.e., �?rms are more likely to include each other in the disclosed set of peers used to benchmark pay levels). We also �?nd empirical support for three factors contributing to the increase in reciprocal benchmarking; the mandatory disclosure of compensation peer groups, say on pay, and proxy advisory in�?uence. Finally, we �?nd that reciprocal benchmarking has meaningful consequences on managerial behavior; it reduces risk-taking by weakening external tournament incentives.

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Bibliographic Reference

Jochem, T, Ormazabal, G and Rajamani, A. 2020. 'Why Have CEO Pay Levels Become Less Diverse?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15523