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Shoot the Arrow, Then Paint the Target: CEO Compensation and Institutional Shareholder Services Benchmarking

Published online by Cambridge University Press:  09 September 2022

Subramanian R. Iyer ,
Oded Palmon Open the ORCID record for Oded Palmon [Opens in a new window]  and
Harikumar Sankaran
Subramanian R. Iyer
Affiliation:
University of New Mexico Anderson School of Management [email protected]
Oded Palmon*
Affiliation:
Rutgers University Rutgers Business School – Newark and New Brunswick
Harikumar Sankaran
Affiliation:
New Mexico State University College of Business [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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We document that firms that expect their CEOs’ compensation to exceed the median CEO compensation of their Institutional Shareholder Services (ISS) peers influence ISS to revise these peer sets. Controlling for changes in firm characteristics that ISS uses to select peers, we find that ISS applies an abnormally high turnover rate in the members of these peer sets and increases the representation of focal firms’ chosen peers. This turnover results in increases in the medians of the ISS peers’ CEO compensation and size. We find that these firms underperform and conclude that they attempt to camouflage high CEO pay to mitigate outrage costs.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 7 , November 2023 , pp. 3121 - 3152
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Paul Malatesta (the editor) and Jun Yang (the referee) for their insightful comments. We are grateful for the conversations with Jim Wolf (Meridian Compensation Partners) and Nathan Worthington (ISS). We thank Shuting Hu (discussant), Simi Kedia, Doron Levit, Tao Li, and Kristina Minnick (discussant), participants in the 2019 European Financial Management Association Conference, 2019 Financial Management Association Conference, and Rutgers University seminar. We also thank Institutional Shareholder Services (ISS) for providing the compensation peer group data. A previous version of the article was titled “Sunlight is the Best Disinfectant: Bias in ISS Peer Group Replacements.” All remaining errors are ours.

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