The Dynamics of Controversial Practices: SEC Sunshine, Aspirational Pay, and the Evolution of Executive Compensation Networks

Stimulated by 2006 Securities and Exchange Commission (SEC) regulations that required large firms to report their compensation peers, a set of recent papers have concluded that many companies favor "aspirational" peers (i.e., larger companies and with better paid CEOs than the focal company). Research on the use by companies of aspirational peers has focused on the prevalence and average overall level of bias, and has attempted to explain bias in terms of organizational and CEO characteristics rather than in terms of the networked environment. However, public corporations are tied to one another in networks along various dimensions, including similarity in industry and size, board interlocks, the sharing of compensation consultants, and the network of asserted compensation peers used by companies in the setting of executive compensation. The proposed research tests the theory that pressures for legitimacy and rationalizations of practices of contested legitimacy occur through mechanisms of local comparison, which involve both information transfer and the mimicry and co-evolution of controversial practices. Using stochastic actor oriented network analytic methods, the proposed research will estimate the effects of social influence and social comparison on the evolution of compensation networks in the post-2006 period, when the network is newly visible both to researchers and to the corporations themselves as a consequence of the new SEC rules. These questions are addressed through the analysis of a unique database that contains information on compensation peers for the universe of companies that have reported this information since the new regulations came into effect.

Intellectual Merit: The intellectual merit of this project is the new understanding it promises about the dynamics of compensation peer networks of publicly traded corporations and the illumination these dynamics offer on the diffusion and modification of controversial organizational practices. A longstanding literature on the diffusion of innovations and organizational practices treated the practices in question as relatively fixed and studied the rate and extent of diffusion through the population. More recently, scholars have focused on the fact that many organizational practices are controversial, and as a consequence they advance, evolve, and retreat in response to environmental pressure and the conflicting interests of organizational actors and stakeholders. This recent literature emphasizes characteristics of organizations (e.g., the "fit" of the practice with the organization and organizational actors along various dimensions) that potentially explain the adoption, adaptation, or relinquishment of controversial practices. In contrast, the impact of organizational networks on the spread and evolution of controversial practices is relatively unexplored. The proposed research contributes to the filling of this gap. In the process it may provide an explanation for how the overall upward compensation bias in executive compensation peer groups is maintained and whether it is likely to persist into the future.

Broader Impacts: The broader impacts of the proposed research include the training of undergraduate and graduate students and the potential value of the proposed research for public policy. The project will also allow the continued collection of longitudinal data on compensation peers on a scale that does not elsewhere exist. After the project is concluded, these data will be made available for other researchers and also accessible for a non-technical audience. Using Javascript and HTML5 the query results can be visualized as a network, and network descriptives will be presented in a table. Publishing the data through such an infrastructure allows the data to be used for education purposes, and it allows non-technical audiences to explore this rich data source. The algorithm used to identify and extract peers from corporate annual reports in the electronic archive of the SEC can easily be generalized to extract systematic and previously unavailable data items in a wide variety of contexts. Instructions will be provided to allow researchers to use the algorithm for such purposes.