Compensation benchmarking, compensation convergence, and executive mobility: An empirical analysis

Compensation benchmarking has become a common practice for determining executive compensation in companies. The key motive for compensation benchmarking is to identify an appropriate way of compensating executives, with the primary goal of human capital retention. In this study, we argue that compensation benchmarking leads to convergence in executive compensation by directing attention and informational cues following two mechanisms: a) direct peer influence through the selection of compensation peers, and b) indirect peer influence through exposure to the same compensation peers. Using an extensive panel of executive compensation data of publicly traded U.S. companies we show that compensation benchmarking leads to convergence in executive compensation levels and mix and in turn reduces the likelihood of executive mobility to peer companies. We discuss theoretical and practical implications.