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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

Sheng-Syan Chen Open the ORCID record for Sheng-Syan Chen [Opens in a new window] ,
Cheng-Yi Chien Open the ORCID record for Cheng-Yi Chien [Opens in a new window]  and
Chia-Wei Huang
Sheng-Syan Chen
Affiliation:
National Taiwan University College of Management [email protected]
Cheng-Yi Chien
Affiliation:
Feng Chia University College of Finance [email protected]
Chia-Wei Huang*
Affiliation:
National Chengchi University College of Commerce
*
[email protected] (corresponding author)
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Abstract

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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 4 , June 2024 , pp. 1886 - 1925
Copyright
© 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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