Ray Rui Gao is an Assistant Professor of Accounting at the Marshall School of Business, University of Southern California, and Yifei Lu is an Assistant Professor of Accountancy at the Gies College of Business, University of Illinois Urbana-Champaign. This post is based on their article forthcoming in the Journal of Accounting Research.
Every year, public companies list a set of “peer” firms in their proxy statements to benchmark top executive pay. These compensation peer group disclosures might seem routine, but they contain rich information about who competes for top executive talent. In our forthcoming study (Journal of Accounting Research, in press), we tap into this data in a novel way by using network analysis of peer group disclosures to map the managerial labor market. Our study generates novel managerial labor market classifications and competition measures, offering novel insights beyond traditional product industry-based measures. In a sense, it is the managerial labor market analog to the network-based product market classifications by Hoberg and Phillips (2010, 2016).
From Product Industry Peers to Compensation Peer Network
Traditionally, researchers assumed that a company’s competitors for executive talent were mostly those in the same product industry or of similar size. However, this can be misleading. Many firms recruit executives from outside their product industry: think of a retail company hiring a tech executive to develop the e-commerce business (e.g., Nike hired John Donahoe from ServiceNow as CEO in 2019). We argue that we can better capture these complex relationships by looking at the network of disclosed peers across all firms. In practice, most large companies disclose a peer group of around 15–20 firms for pay benchmarking (over 97% of S&P 500 firms do so). Because boards consider multiple factors, such as industry, size, and specific talent needs, when selecting these peers, each disclosure embeds rich information about a firm’s talent competitors. For example, Delta Air Lines in its proxy statements in 2019 mentioned that “our peer group is composed of three major U.S. airlines and eighteen other companies in the hotel/leisure, transportation/distribution/machinery/aerospace/ defense, and retail industries,” and that “in order to retain and attract the talent we need, Delta must compete with these types of companies”. Still, any one company’s list is limited in scope. By aggregating all peer relationships across firms, we let the market itself reveal a broader set of potential talent competitors, including those a firm might not have identified on its own. We then construct a network “map” of companies connected by peer relationships. If Company A lists Company B as a peer, we draw a link between A and B. Collectively, these links form a web that shows which firms see each other as comparable in the market for managerial talent.
This network-based approach reflects competition in multiple dimensions, not just industry, but also size, geography, specialized skill sets, and so on. It’s a dynamic view that can evolve as companies update their peer groups annually. Each firm’s position in the network indicates its labor market neighborhood: companies closely linked in the network likely compete for the same pool of executives. This is a big shift from static product industry classifications. For example, an innovative media company might appear in the peer networks of tech firms if both are hunting for executives with digital content expertise, even if traditional product industry classifications wouldn’t pair them. By analyzing the overall peer network, our study essentially lets “the crowd” of boards reveal how they perceive the landscape of executive talent competition. READ MORE »
