Why Have CEO Pay Levels Become Less Diverse

We document that, over the last decade, the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within industry and industry-size groups. We find evidence consistent with one potential explanation for this pattern; reciprocal bench-marking (i.e., firms are more likely to include each other in the disclosed set of peers used to benchmark pay levels). We also find empirical support for three factors contributing to the increase in reciprocal bench-marking; the mandatory disclosure of compensation peer groups, say on pay, and proxy advisory influence. Finally, we find that reciprocal bench-marking has meaningful consequences on managerial behavior; it reduces risk-taking by weakening external tournament incentives.