The Advisors' Blog

– Liz Dunshee

You hear quite a lot in this space about CEO pay levels ratcheting up due to peer benchmarking and every company wanting to pay “above median.” A recent academic paper confirms that variations in CEO pay really have diminished over the last decade, since companies started disclosing peer groups and submitting “say-on-pay” resolutions. The more interesting thing that the paper found was that CEOs appear to be less inclined to take risks that could spur jumps in company performance, supposedly because they don’t see a lot of room for upward pay mobility if they get recruited away to a peer company.

I’m not completely sold, because CEO mobility has also been blamed for skyrocketing pay packages. But the data (from 5000 US companies from 2002 – 2018) did seem to support the findings. Here’s an excerpt:

That is, if the manager is successful, she could receive an offer by the industry peer paying the highest amount and/or has an external benchmark for a wage renegotiation with her board. To retain the executive the incumbent firm may then have to match this alternative pay offer. Figure 9 confirms that external tournament incentives decrease significantly over the sample period.

Overall, our evidence suggests that recent institutional developments have induced a decrease in pay variation, with meaningful consequences for firms’ outcomes.