The Effect of Compensation Benchmarking - Evidence From Share Repurchases

We find that focal firms’ CEOs respond to increasing repurchases by their publicly disclosed compensation peer (CP) firms by repurchasing more of their own shares. The CP herding effect is stronger for small focal firms or those with substantial stock or option-based compensation than for other focal firms. CPs with prominent CEOs have a more significant impact on the focal firm, and the CP effect is stronger for CPs that are larger, have a longer CP relation, or having also chosen the focal firm as their CP (i.e., two-way CP relation). We establish a causal effect of CP herding on repurchases using several methods, including CEO–pair disconnections. We find that share repurchases of CP firms negatively affect focal firms’ CEO pay while increasing the CP firms’ chance of being used as the focal firm’s CPs in the future. Overall, this paper provides evidence of the impact of compensation benchmarking on corporate payout policies