Peer benchmarking and CEO compensation: An examination of the community structure of the compensation peer network

• Published date: 01 July 2023
• Author: Tsvetomira V. Bilgili,Hansin Bilgili,Alan E. Ellstrand,Jonathan L. Johnson
• Date: 01 July 2023
• DOI: http://doi.org/10.1111/corg.12482

ORIGINAL ARTICLE

Peer benchmarking and CEO compensation: An examination of

the community structure of the compensation peer network

Tsvetomira V. Bilgili

1

| Hansin Bilgili

1

| Alan E. Ellstrand

2

| Jonathan L. Johnson

2

1

Department of Management, Kansas State

University, Manhattan, Kansas, USA

2

Department of Strategy, Entrepreneurship

and Venture Innovation, University of

Arkansas, Fayetteville, Arkansas, USA

Correspondence

Tsvetomira V. Bilgili, Department of

Management, Kansas State University, 1301

Lovers Lane, 3091 Business Building,

Manhattan, KS 66506, USA.

Email: bilgili@ksu.edu

Funding information

College of Business Administration at Kansas

State University

Abstract

Research Question/Issue: The increase in executive pay has been attracting atten-

tion to the practice of peer benchmarking, which is commonly used to determine

CEO compensation. Using a network approach, we construct and analyze the com-

pensation peer network and examine how the structure of the network influences

CEO pay.

Research Findings/Insights: Using data on public firms in the period between 2006

and 2020, we find that the peer network exhibits strong community structure and

that bridging across communities influences CEO pay. Specifically, CEO pay increases

by approximately $10 million as the number of bridging ties increases from 30 to

100, which indicates that obfuscation can result in inflated CEO pay and supports

the managerial power perspective.

Theoretical/Academic Implications: We empirically distinguish the predicted effect

of peer benchmarking on CEO pay as outlined in the market for executive talent and

the managerial power perspectives. We show that firms may avoid scrutiny and offer

high CEO compensation when they either have a very small number of targeted

bridging ties or a very large number of diffused, nontargeted bridging ties in the peer

network.

Practitioner/Policy Implications: The intent of peer benchmarking was to make CEO

compensation practices more transparent, legitimate, and functional; however, our

findings indicate that these intentions have not been fully realized and instead bench-

marking can be used to inflate CEO pay while avoiding stakeholder scrutiny through

obfuscation. These insights provide an opportunity to policy makers to be more

effective in encouraging additional transparency and stronger justification for boards'

choice of peers.

KEYWORDS

corporate governance, bridging ties, CEO compensation, network communities, peer

benchmarking

1|INTRODUCTION

“The peer group is the bedrock of the compensation

philosophy at a company,”said James F. Reda, an

independent compensation consultant in New York.

“But a lot of people do it by the seat of their pants, and

that is part of the reason why executive pay has really

skyrocketed.”(Morgenson, 2006—The New York Times)

Received: 30 August 2020 Revised: 22 June 2022 Accepted: 30 June 2022

DOI: 10.1111/corg.12482

582 © 2022 John Wiley & Sons Ltd. Corp Govern Int Rev. 2023;31:582–596.wileyonlinelibrary.com/journal/corg