Do Experts on the Compensation Committee Prevent CEOS from Using Their Influence to Benchmark Against Better-Paid Peers?

Peer group benchmarking, which compares executive compensation contracts against a group of similar companies, is a widely used yet heavily debated technique for setting executive compensation. Critics argue that it has produced an increase in top executive compensation. Prior research indeed confirms that companies are more likely to benchmark against peers that pay their CEO more. Using an eleven-year S&P 900 sample, we first examine the channels through which CEOs might use their influence to opportunistically benchmark against better-paid peers. Second, we investigate whether two types of compensation committee expertise, namely, industry expertise and human resource expertise, can be helpful in counteracting CEO influence on the benchmarking process. Our findings show that compensation committees that contain at least one industry expert can mitigate the effect of CEO influence on peer selection. However, we do not find a mitigating effect for the presence of a human resource expert on the compensation committee. In additional analyses, we show that human resource experts have less authority to influence compensation committee decision-making than do industry experts. Our results are relevant for regulators, who largely neglect the role of expertise in compensation committees