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We examine the blending of informational and political forces in organizational categorizations in the context of chief executive officer (CEO) compensation. By law, corporate boards are required to provide shareholders with annual justifications for their CEO pay allocations that contain an explicit performance comparison with a set of peer companies that are selected by the board. We collected and analyzed information on the industry membership of chosen peers from a 1993 sample of 280 members of the Standard and Poor's (S&P) 500. Our results suggest that boards anchor their comparability judgments within a firm's primary industry, thus supporting the argument that boards' peer definitions center around commonsense industry categories. At the same time, however, we found that boards selectively define peers in self-protective ways, such that peer definitions are expanded beyond industry boundaries when firms perform poorly, industries perform well, CEOs are paid highly, and when shareholders are powerful and active.
Porac et al. (Mon,) studied this question.