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The Use of Peer Groups in Setting Director Compensation: Competition for Talent Versus Self-Serving Behavior
Published online by Cambridge University Press: 11 April 2023
Abstract
Recent Delaware Chancery Court decisions that boards are self-interested in setting director compensation have focused scrutiny on the pay-setting process used by corporations. We examine the effect of peer benchmarking on director compensation decisions. Director pay relates positively to peer director pay, and firms paying their directors highly are selected as peers. Moreover, firm performance and board advising performance are positively related to the talent component and are generally unrelated to the self-serving component of the peer pay effect. The evidence indicates that firms use peer benchmarking to justify high compensation mainly to attract talented directors to enhance board quality.
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- Research Article
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- © The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
We are especially grateful for constructive comments from Jarrad Harford (the editor) and Jun Yang (the referee). We also thank Vincent Chen, Yenn-Ru Chen, Yi-Ting Hsieh, Frank C. Jen, Jun-Koo Kang, Yu-Chen Kuo, Cheng-Few Lee, Hsin-Yu Liang, Jia-Wen Liang, Kwei Tang, Tzu-Ching Weng, Anne Wu, Chiming Wu, and seminar participants at National Chengchi University, National Taiwan University, Feng Chia University, and Yuan Ze University for helpful comments and suggestions. We gratefully acknowledge financial support from the National Science and Technology Council (formerly the Ministry of Science and Technology) of Taiwan.
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