The Effect Of Social Pressures On CEO Compensation

Abstract

We find that social pressures have a positive effect on CEO compensation. Social pressures come from frequent interactions with other CEOs, wealthy people, and social elites in the local area; from attending industry events; and from comparing luxury homes. Pay premiums associated with social pressures (social premiums) are calculated after incorporating the effect of other known pay determinants. We show that social premiums are lower when the physical distance is longer and social interactions less frequent. Our results hold in a pay change regression. They are also robust to adding state fixed effects and firm fixed effects. Practically, our research suggests that social pressure contributes meaningfully to every rising CEO pay. This understanding enables policy makers, large institutional investors, and boards to use alternative incentives (other than increasing pay and regulations) to effectively address CEOs’ need for status.