Pay Harmony: Peer Comparison and Executive Compensation
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-06-19
In our paper, Pay Harmony: Peer Comparison and Executive Compensation, which was recently made publicly available on SSRN, we find evidence consistent with the presence of peer comparison influencing pay policies for executives inside firms. Our underlying approach is to measure changes in pay co-movement, disparity and productivity using a 1992 SEC ruling that mandated greater disclosure of top executive pay. We argue that this ruling led to greater awareness of pay and, hence, greater peer comparison throughout all managerial ranks, particularly in non-proximate managers who had natural information barriers prior to the ruling.
We present the results of three analyses that, taken together, support the argument that firms’ pay policies respond to peer comparison and concerns about internal equity. In general, we find evidence that pay variance within firms, pay distance between managers and division productivity all increased during this period. However, we find that these measures increased less among firms and managers that were more affected by the 1992 SEC disclosure rule. Specifically, after the new regulation, we find increases in PRS (pay-referent sensitivity)—or greater co-movement of division manager pay—and decreases in PPS (pay-performance sensitivity) in geographically-dispersed firms, but not in concentrated firms.