Industry categories and the politics of the comparable firm in CEO compensation

We examine the blending of informational and political forces in organizati onal categorizations in the context of chief executive officer (CEO) compen sation. By law, corporate boards are required to provide shareholders with annual justifications for their CEO pay allocations that contain an explici t 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 ju dgments 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 s elf-protective ways, such that peer definitions are expanded beyond industr y boundaries when firms perform poorly, industries perform well, CEOs are p aid highly, and when shareholders are powerful and active.*