Peer‐group dependence in salary benchmarking: a statistical model

Although salary benchmarking is widely used to help set compensation, there has been a lack of attention to the statistical implications of this practice on compensation patterns of peer institutions. We adapt some empirical tools from spatial econometrics to analyze compensation decisions exhibiting peer-group dependence, and apply the methods to compensation of administrators in Texas nursing facilities. We find evidence that this leads to dependence of administrators pay on average pay of administrators in ‘peer’ facilities, defined here as those having similar outlays on nursing services. This leads to a situation where changes in facility characteristics, such as the occupancy rate and the revenue received from Medicaid and from private‐pay residents, impact compensation of own‐institution administrators as well as that of administrators from other peer facilities. Our peer‐group model appears applicable to other areas of organizational, regulatory and behavioral research and can easily be implemented using publicly available software. Copyright (C) 2010 John Wiley & Sons, Ltd.