David F. Larcker is James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Charles McClure is Assistant Professor at the University of Chicago Booth School of Business; and Christina Zhu is Assistant Professor at the Wharton School at the University of Pennsylvania. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).
Our new study examines the board of director choice of peer firms used in setting CEO compensation. One controversial question is whether selecting relatively large, highly paid peer firms is appropriate. The common rationale is that many firms want to attract and hire highly talented executives from larger firms with higher levels of CEO pay. However, governance activists and proxy advisors believe some firms select peers that are larger and/or have higher compensation levels simply to justify a high level of CEO pay.
We provide a different interpretation of peer group choice than prior research on this topic. Previous studies tend to conclude that peer group choice is a result of aspirational labor market incentives and that corporate governance considerations are of minor importance. However, prior research tends to focus on large firms that confront considerable scrutiny regarding their corporate governance. In such a sample, it will be difficult to observe whether governance considerations affect observable board of director decisions such as CEO compensation. Using a comprehensive sample with many small and medium-sized firms that are less subject to public scrutiny, we find that both aspirational and rent extraction motivations influence the selection of peer groups for setting CEO compensation.
Comment Letter Regarding Mandatory Arbitration Bylaw Proposal at Johnson & Johnson
More from: Jeffrey Mahoney, Council of Institutional Investors
Jeff Mahoney is General Counsel of Council of Institutional Investors. This post is based on a comment letter from CII to Chairman Jay Clayton of the U.S. Securities and Exchange Commission.
I am writing on behalf of the Council of Institutional Investors (CII). CII is a nonprofit, nonpartisan association of public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management exceeding $4 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families. Our associate members include a range of asset managers with more than $25 trillion in assets under management. [1]
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