Peer Firm Selection and Executive Compensation: The Case of Dual-role Peers


The Securities and Exchange Commission’s 2006 Executive Compensation Disclosure Rules require firms to disclose how executive pay is determined by benchmarking total compensation at the competitive labor market level (compensation benchmarking) and by benchmarking performance targets in relative performance evaluation (performance benchmarking). Prior studies examining the selection of peer firms typically focus on one or the other benchmark. Using Incentive Lab’s detailed data on proxy statements from 2006 through 2015, we find that approximately 57% of the peers are used simultaneously for both compensation and performance benchmarking, a pattern largely ignored in prior literature. We label these peers as “dual-role peers” and show that firms can indeed succeed in selecting such peers in order to achieve high pay and yet low expected performance. Moreover, we find that the extent of such discretionary peer selection is positively associated with realized excess CEO pay, and negatively associated with ex-post stock performance in the subsequent year. Additional evidence shows that the power of CEOs to intervene the boards’ compensation decisions exacerbates the opportunistic peer selection. Our study provides new evidence on managerial self-serving behavior in compensation practices and highlights the importance of considering dual-role peers in compensation research.

Government Ownership, Non-CEO Top Executives’ Horizontal Pay Dispersion and Firm Performance

Wei Jiang, Bin Ke, Hong Ru, and Yue Xu

The objective of this study is to analyze the compensation practices of non-CEO top executives as a group measured by horizontal pay dispersion. We address two specific questions. First, we examine whether government ownership affects non-CEO executives’ horizontal pay dispersion. Second, we examine how such ownership-induced horizontal pay dispersion affects firm performance. We find that non-CEO top executives’ horizontal pay dispersion is lower in government-controlled firms (SOEs) than in privately-controlled firms (non-SOEs). We show that the difference in horizontal pay dispersion between SOEs and non-SOEs is consistent with the institutional differences between the two ownership types. There is evidence that such ownership-induced horizontal pay dispersion is associated with lower firm performance, suggesting that SOEs’ horizontal pay dispersion is suboptimal from the perspective of shareholder value maximization.

Direct Evidence on Earnings Used in Executive Compensation Performance Measurement


Motivated by competing theories on the properties of earnings required for compensation performance measurement, we provide direct evidence on the properties of actual accounting earnings that are used in determining compensation payouts (Compensation Earnings). Using a large sample of manually collected Compensation Earnings for U.S. firms, we show that firms make economically significant adjustments to GAAP Earnings in arriving at Compensation Earnings. While GAAP Earnings exhibit conservatism, we fail to detect conservatism (either by statistical significance or by magnitude of coefficient) in Compensation Earnings using the same sample and the same research design. The absence of conservatism in Compensation Earnings is also documented in various subsamples partitioned on market-to-book ratio, leverage, firm size, and corporate governance. Further analyses indicate that the adjustment from GAAP Earnings to Compensation Earnings involves the removal of less persistent components of GAAP Earnings, resulting in Compensation Earnings that are more persistent than GAAP Earnings.

Do Repatriation Tax Holidays Promote Corporate Social Responsibility? Evidence from the American Jobs Creation Act


In response to the temporary tax holiday introduced by the American Jobs Creation Act, U.S. multinational corporations repatriated approximately $300 billion from their foreign subsidiaries to the United States. We find that repatriating firms invest at least a portion of the repatriated funds in corporate social responsibility (CSR) initiatives, as evidenced by increasing CSR performance of the repatriating firms relative to non-repatriating firms during the years after the repatriation. The effect of repatriation on CSR performance is more pronounced for financially unconstrained firms, poorly governed firms, and firms located in states with stronger stakeholder preferences for CSR.

Styles of regulators: Evidence from the SEC’s comment letters


Security regulations are enforced by SEC staff members. Conceptually, the regulations are to be uniformly enforced despite personal differences among SEC enforcers. We offer evidence to the contrary. Using the SEC’s comment letters as our setting, we find that SEC staff members exhibit unique personal “styles.” The effects of their personal styles on firms’ remediation costs, the contents of SEC comment letters, and the quality of firms’ financial reporting are surprisingly large. We manually collect information on SEC staff members. Our results demonstrate that female staff members are generally tougher reviewers and that CPA qualification matters. Overall, our study offers evidence that SEC staff members exhibit individual differences, and their styles shape firms’ financial reporting.

Out-of-equilibrium CEO Incentives, Dynamic Adjustment and Financial Misreporting

Robert Bushman, Zhonglan Dai and Weining Zhang


The objective of this paper is to investigate (1) the role of adjustment costs in sustaining divergence between actual and optimal CEO equity incentives; (2) the nature of the dynamic process governing adjustment of non-optimal incentives back towards optimal; and (3) the extent to which deviations from optimal incentives exacerbate financial misreporting. Consistent with adjustment costs driving a wedge between realized and optimal incentives, we document that firm value decreases in deviations from optimal, and that firms only partially close the current gap between target and actual CEO incentives over the subsequent year. Further, speed of adjustment towards optimality varies with differences in monitoring intensity, product market competition and CEO tenure. Examining consequences of out-of-equilibrium incentives, we find that financial misreporting is increasing in the deviation from optimal, where the sensitivity of misreporting to deviation is stronger when CEO incentives are excessive relative to when they are below optimal levels. Finally, the sensitivity of misreporting to deviation is lower for firms with higher monitoring intensity, and magnified for firms with more intense product market competition and early term CEOs.

Controllability of Risk and the Design of Incentive-Compensation Contracts

Christopher S. Armstrong, Stephen Glaeser and Sterling Huang


We examine how the ability to control firm exposure to risk affects the design of executive compensation contracts. To do so, we use the introduction of exchanged-traded weather derivatives, which significantly increased executives’ ability to control their firms’ exposure to weather risk, as a natural experiment. We find that executives for whom weather derivatives have the greatest impact on the ability to control firm exposure to weather risk experience relative declines in total compensation and equity incentives. The former finding is consistent with a reduction in the risk premium that executives receive for their firms’ exposure to weather risk. The latter finding suggests that risk and incentives are complements when executives can control their firms’ exposure to risk. Collectively, our results show that the executives’ ability to control their firms’ exposure to risk alters the nature of agency conflicts and influences the design of incentive-compensation contracts.

23 CKGSB Alumni Named on 2021 Forbes China Philanthropy List

In the recent 2021 Forbes China Philanthropy List, 23 of the 100 top Chinese entrepreneurs who had made the most contributions to public welfare were CKGSB alumni. Compiled based on cash donations of individual and corporate donors in China during 2020, this year’s list represents 221.7 billion RMB (approx. US $34.21 billioncash donations made to charity, in which CKGSB 23 alumnis contributions of 63 billion RMB (approx. US $9.72 billion) make up 30% of the total amount.

In addition to the Philanthropy List, CKGSB alumni also had a prominent presence in other lists that Forbes China recently released, amplifying CKGSB’s positioning as the preferred choice for business leaders:

  • 2021 Forbes China’s 50 Best CEO: 7 CKGSB alumni listed
  • 2021 Forbes China’s 100 Top Businesswomen: 11 CKGSB alumni listed
  • 2021 Forbes China’s 50 Women in Tech: 2 CKGSB alumni listed
  • 2021 Forbes China’s 20 Up-and-coming Businesswomen: 1 CKGSB alumni listed
  • 2021 Forbes China’s 100 Most Innovative Companies: 6 CKGSB alumni companies were listed

Since its establishment in 2002, philanthropy has been part of CKGSB’s DNA and core responsibility. CKGSB’s vision is to influence the Chinese business community in addressing societys most challenging problems and sharing best practices in social innovation from China with the world. We are proud of our alumni in their unwavering dedication to give back to society as evidenced in the recent Forbes rankings!

Click here for more information on CKGSBs efforts in social innovation and social responsibility. 



Industry Experts Join CKGSB Professor, Zhu Rui, to Assess China’s ESG Environment at Asia House Event


Cheung Kong Graduate School of Business (CKBSB) Professor of Marketing and Director of the Social Innovation and Business for Good Center, Zhu Rui, along with industry experts shared insights on China’s global environmental, social and governance (ESG) reporting, its new environmental impact regulations and the future of ESG investment.  Zhu was joined by Wang Xitong (Adeeb), Head of Senior Affairs/Senior Associate at Everbright Belt & Road Green Fund, Michelle Cameron, Head of Sustainable Investment and Finance Sales, Asia at Refinitiv (a subsidiary of the London Stock Exchange Group), and Phyllis Papadavid, Head of Research and Advisory at Asia House, at an event hosted by Asia House on May 17. 


Optimism and Growth


Professor Zhu kicked off the webinar with a discussion on how attitudes towards ESG in China are shifting, “When I started teaching in 2016, the concept [of ESG] was very rarely known among my Chinese audience. Over the years, I saw a change in terms of how much people are paying attention [to ESG]”. Since 2021, Zhu has been leading the “Social Innovation and Business for Good” Field Course at CKGSB. The one-year, socially-minded field course requires students to initiate sustainable business practices in their companies or organizations. This field course started as a core course in the school’s Executive MBA program and is now being expanded to other programs.


The panelists expressed optimism towards the current ESG landscape. Zhu said, “during times of crisis, I see a greater demand from the public and consumers asking companies to pay more attention to be more responsible, to adopt ESG principles.”


Wang was also optimistic about the direction ESG is taking in China. He mentioned that the cumulative returns of the CSI 500 ESG benchmark index are 8.1% higher than the parent index.


He pointed out some key regulations in China: In 2020, the Hong Kong Stock Exchange required all listed companies to disclose ESG reports. In 2020, the China Banking and Interest Regulatory Commission issued a guidance requiring banking and financial institutions to incorporate ESG reporting into the entire credit granting process. In April 2022, the China Securities Regulatory Commission issued deadlines for listed companies to include ESG in the communication content of investor relations for the first time.”


However, Papadavid noted, “the push for sustainability comes at a time of heightened geopolitical and macroeconomic risk, and the nature of the slowdown means that persistent weakness in certain sectors of the economy will take precedence over the push for sustainability.” 


Worldwide Challenges


One of the key themes that featured in the webinar was the challenge to ESG reporting in China and around the world due to a lack of unified standards in ESG reporting.


When Zhu first started teaching ESG related courses, she used the Sustainability Accounting Standards Board (SASB) which categorizes ESG standards across 77 industries. However, Zhu highlighted, “there are a lot of these guidelines around the world and criteria you have to meet, but some of them don’t quite fit into the Chinese context. For example, in the gaming industry, which falls into the “Internet Media and Service Industries” category, its ESG criteria relates to consumer privacy, data privacy, employee engagement and inclusiveness. But these issues are not what Chinese computer game companies pay attention to. They care more about gaming addiction in adolescents.” Zhu is now working with her colleagues to promote initiatives and guidelines for each industry centering around ESG principles in a Chinese context.


Cameron agreed with Professor Zhu, saying that “there are different weightings that need to be applied across different sectors depending on which parts of ESG they have more exposure to.” She also identified the problem that, due to many ESG data providers, there are many ways in which the data is collected.


Further discussion involved data consistency required for global ESG reporting. Cameron said, “we need to get to a point where we can run and compare data across the globe and look at the differences between the industries in the different jurisdictions.”


Wang developed this point further: “A lack of globally accepted standards is a problem…we have seen a lot of ESG or green finance rating agencies in the market, but each of them has their own set of ESG or green finance indicators and their own approaches to give ESG and green finance scores. A unified standard for ESG or green finance is important not only for investors but also for consultancy firms.”