Abstract
We analyze firms that disclose both compensation and performance peers. We find that more than half of these peers serve a dual benchmarking function, and we refer to these peers as “dual-role” peers. We find that dual-role peers are associated with higher executive pay, lower performance levels, and diminished pay-for-performance sensitivity. These findings are consistent with opportunistic peer selection. To quantify the extent of opportunistic peer selection employed by firms utilizing dual-role peers, we introduce a novel firm-level peer selection index (PSI). We find that firms with a higher PSI tend to offer higher CEO compensation but experience poorer stock performance in the future. Furthermore, supplementary evidence suggests that CEO influence exacerbates the prevalence of such opportunistic peer selection, aligning with the opportunism hypothesis. Our evidence shows that many firms have the capability to select peer firms demonstrating low performance yet commanding high executive compensation. Collectively, these findings underscore the prevalence of managerial opportunism in the peer selection process for dual benchmarks.
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