DP15523 Why Have CEO Pay Levels Become Less Diverse?

Author(s): Torsten Jochem, Gaizka Ormazabal, Anjana Rajamani
Publication Date: December 2020
Keyword(s): Clustering of executive pay, competitive benchmarking, pay disclosure, pay diversity, pay transparency, tournament incentives
JEL(s): G3, G34, G38, M12, M52
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15523

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.