The Effect of Social Pressures on CEO Compensation1

James Ang

Florida State University

Tallahassee, Florida 32306

jang@cob.fsu.edu

Gregory Nagel

Middle Tennessee State University

Murfreesboro, TN 37132

gnagel@mtsu.edu

Jun Yang

Indiana University

Bloomington, Indiana 47405

jy4@indiana.edu

1We thank Nancy Acker, Lucy Ackert, Alex Borisov, Alex Butler, Randall Campbell, Melanie Cao, Michael

Faulkender, Gerry Garvey, Eitan Goldman, Paul Grimes, Jeff Fisher, Byoung-Hyoun Hwang, Edwards Lazear,

Cassandra Marshall, Ron Masulis, Todd Milbourn, Laura Starks, Irina Stefanescu, Ralph Walkling, David Yermack,

Scott Yonker, Julie Zhu, Richard Mahoney (retired CEO from Monsanto Co.), the referee (anonymous), and seminar

participants at Erasmus University, Indiana University, Mississippi State University and Washington University in

St. Louis, and session participants at the 2009 China International Conference in Finance, the 2008 Financial

Management Association meetings, and the FMA European meetings in Prague. We thank Scott Yonker for sharing

the CEO home data and the Council for Community and Economic Research for providing us with the data on cost

of living index; and Hannah Bolte and Jaden Falcone for editorial help.

The Effect of Social Pressures on CEO Compensation

Abstract

We analyze the effect of social pressures on CEO compensation via interacting with other CEOs,

Forbes 400 people, and social elites in the local area; attending industry, alumni, and charitable

events; and comparing luxury homes. Each venue is an independent source of social pressures

that elevate CEO pay to a level not explained by local economic conditions, firm performance

and characteristics, and corporate governance. Social premiums in CEO pay are greater at firms

with young, non-Ivy League and non-narcissistic CEOs and at firms with directors who are

likely to understand and conform to social norms (well governed or locally rooted).

Classification Code: G3, J31, J33

Keywords: Corporate governance; CEO compensation; social interactions; reference groups;

social pressures.

The Effect of Social Pressures on CEO Compensation

“I think that what Larry Ellison and Bill Gates have is phenomenal wealth,” Netscape cofounder Jim

Clark once remarked. “I'm just a two-bit billionaire.”2

The increases in the level and dispersion of CEO compensation since the early 1990s

have attracted much attention from the media, activist shareholders, regulators, and financial

economists. Much progress has been made in understanding CEO compensation – how CEOs

should be paid (the pay for performance relationship)3 and whether their interests could ever be

aligned with those of shareholders. In recent years, entrenched CEOs and lax boards of directors

have often been blamed as culprits of the observed pattern of CEO pay.4 Still, that which might

have caused highly-paid CEOs to expect even higher pay remains far from fully understood.

To shed light on this heated debate from a new perspective, we investigate the effect of

social interactions and pressures from social peers on CEO compensation. In particular, we show

that CEO compensation contains an element (referred to as the social premium) that is positively

linked to social pressures. The social premium cannot be explained by performance, firm

characteristics, CEO characteristics, and governance factors previously shown to affect CEO

compensation. In addition, the social premium remains after controlling for the economic

condition in the local area.

As is well documented in the sociology and economics literature, one’s happiness (and

thus utility) at least in part depends on the income of one’s reference group, after controlling for

one’s own income. Azar (2007) attributes the origin of this effect to Weber’s Law, written in the

early 17th century. Arthur Pigou (1920) quotes John Stuart Mill’s observation that “men do not

desire to be rich, but richer than other men.”5 Seidl, Traub, and Morone (2006) document the

effect of relative income in experimental studies, and Hagerty (2000) and McBride (2001) do so

in empirical studies. Hamermesh (1975) formally models the influence of relative wages on

efforts and incentives.

2 Globe and Mail, March 10, 2004.

3 See Murphy (1999) for a comprehensive review of the literature on executive compensation.

4 Bebchuk and Fried (2004) exemplify the criticisms of the economic model’s ability to explain executive pay.

5 This is also quoted by Graham and Pettinato (2002) and Luttmer (2005).

1

Veblen (1934) and Frank (2000) further show that a “consumption arms race” or

“conspicuous consumption” could occur if one must consume more to keep up with the

consumption of one’s comparison group. To sustain the high consumption needed for retaining

or improving social standing, one needs to receive pay higher than one’s peers in the reference

group. Social interactions provide the opportunities to collect information on the pay level

necessary for achieving high social status. As the number of social peers increases, pressures for

greater pay intensify. The resulting continual demand for higher pay is known as the “hedonic

treadmill” hypothesis (Firebaugh and Tach 2005).

To examine the effect of social comparisons and social pressures, it is critical to define

the reference group, i.e., social peers. Luttmer (2005) documents that one’s neighbors are often

one’s reference group. In a happiness survey conducted on 9,200 households in rural China,

Knight, Song, and Ramani (2009) confirm that 70 percent of individuals consider their village as

the reference group. In addition, there is evidence that reference groups are often people of

similar age and educational background (Melenberg 1992).

CEOs, like many other people, interact with their social peers by attending various social

and charitable events. Inevitably, CEOs will interact with other CEOs from their industry

(Bizjak, Lemmon, and Naveen 2008) or in close proximity. Likewise, CEOs retain their school

ties (Cohen, Frazzini, and Malloy 2008; Cohen, Malloy, and Frazzini 2010; Shue 2011) via

reunions and private events at exclusive alumni clubs as well as interact with people who serve

on the same boards of non-profit organizations.

Our primary definition of a CEO’s social peers is other CEOs of firms whose corporate

headquarters are located within 60 miles (100-kilometer) of the headquarters of the CEO’s firm.

We use the locations of corporate headquarters to define social circles for several reasons. First,

business-related social activities of CEOs often occur in the communities where corporate

headquarters are located. Second, the median distance between the corporate headquarters of

S&P 500 firms and the main residences of their CEOs is 13.6 miles (Liu and Yermack 2007),

and hence most non business-related social activities of CEOs also take place near corporate

headquarters. Third, the location of corporate headquarters is determined by factors largely

exogenous to current CEO compensation, such as the origin of the founding family,

infrastructure, local taxes and costs, and availability of human capital, as well as the proximity to

raw materials, suppliers, and customers. It is hard to imagine a board relocating the firm’s

2

headquarters simply to obtain favorable social circles for the CEO. Thus, using locations of

corporate headquarters helps avoid the reverse causality between the choice of social circles and

the determination of CEO compensation. Finally, the choice of the 60-mile distance is based on

many studies in sociology, economics, and finance.6

In secondary tests, we expand the social circles of CEOs to include (1) CEOs from the

same industry;7 (2) Forbes 400 people in the local area; (3) prominent alumni of the CEOs; and

(4) people serving on the same non-profit boards with the CEOs. We find that each social circle

has an effect on the elevation of CEO pay, but there are few interactions between these social

circles.

Social circles can affect CEO pay through social comparison and social pressures. Social

premium is measured by the portion of CEO compensation linked to social circle size but not

explained by economic, governance, or location-specific variables previously shown to affect

CEO compensation. Economic variables include firm size, market-to-book, stock performance,

accounting performance, and firm risk. Governance variables include whether a CEO serves as

the chairman of the board, CEO tenure, the percentage of shares held by blockholders,

institutions and insiders, respectively; the number of directors, the percentage of inside directors,

the Gompers, Ishii, and Metrick (2003) anti-takeover index (GIM), and the number of previous

connections between the CEO and directors, which is a proxy for the social dependence of the

board (Core, Holthausen, and Larcker 1999; Gomper, Ishii, and Metrick 2003; Hwang and Kim

2009). Location-specific variables include stock returns of local firms in excess of market returns

and the cost of living index for professionals in the local area.

Our study focuses on the S&P 1500 companies during 1994-2005 and yields the

following findings. First, CEO compensation contains a social premium. Using the value of ex-

ante total pay (the ExecuComp variable TDC1, expressed in 2005 dollars), we find that the

6 Watts (2004) shows the importance of geography in people’s social network. Kleinberg (2001) suggests defining a

set of geographic groups by “centering” groups of various geographic radii at each person in the network. Urry

(2007) documents that an average American traveled about 30 miles per day in the 2000s. Moreover, the 60-mile

distance is practical for attending social events, which occur fairly frequently but not every day. It has also been

used in numerous studies in economics and finance such as Kedia and Rajgopal (2009), Malloy (2005), and Coval

and Moskowitz (2001). Alternative distances were also used in the literature: Ivkovic and Weisbenner (2007) use 50

miles in defining whether investors are in the neighborhood of the firms in which they invest. 7 Interactions with CEOs from the same industry may not be socially driven because they compete in the product

market and labor market, and often benchmark against each other on performance and executive compensation.

Industry peers, especially ones of similar size, are definitely relevant for pay comparison (Bizjak, Lemmon and

Naveen, 2008). We control for industry peers when showing the social premium related to social peers from the

local area.

3

average pay for a CEO increases by $550,000 as the number of local CEOs increases from 15 to

79 (moving from the 25th

to 75th

percentile of the sample), all else equal. We show that social

premiums exist for various pay measures, and retain after controlling for state fixed effects and a

non-linear effect of the cost of living in the local area. Moreover, the social premium result holds

if we exclude the largest social circles.

Prior literature shows the importance of geography in people’s social network (Watts

2004; Kleinberg 2001). Mok, Carrasco, and Wellman (2009) demonstrate that the frequency of

face-to-face interactions decreases with geographic distance. As a result, the strength of social

pressures and their influence on CEO pay should also decrease with distance. We test the effect

of geographic distance on social premiums and find that the strongest effect exists in social

circles within 30 miles of the headquarters of the CEO’s firm; the effect is weakened by 45% in

social circles of 30 to 60 miles away but remains statistically significant at better than 1%. The

effect of social circles on CEO pay disappears beyond 60 miles. While the 60-mile distance is

manageable for attending social events that occur fairly frequently, the 30-mile distance is more

practical for socializing on a regular basis. This evidence could help us address the potential

concern that local social peers are picking up the effect of unspecified local variables such as

culture, access to local amenities and infrastructure, and proximity to suppliers and customers;

those local factors do not change as dramatically as social interactions when the distance

increases from 30 to 60 miles.

Social pressures for greater pay can only be transformed into pay increases when the

board of directors and the CEO agree on social premiums. How one responds to social pressures

is likely to depend on one’s experience and personal traits. Thus, we investigate how social

premiums vary with CEO age, the status of the CEO’s alma mater, and the CEO’s narcissistic

traits. We find that young CEOs and CEOs who did not graduate from prestigious universities8

are more sensitive to social pressures, likely because they are eager to acquire their social status

via high pay in the absence of pedigree. Interestingly, narcissistic CEOs receive higher total pay

than other CEOs but significantly lower social premiums. Narcissists believe in their superior

ability and thus expect to receive high pay as a proper recognition. At the same time, they shun

8

Prestigious universities include: Ivy Leagues (Brown University, Columbia University, Cornell University,

Dartmouth College, Harvard University, Princeton University, University of Pennsylvania, Yale University),

Stanford University, and MIT.

4

socializing with people deemed inferior and are thus less likely to be exposed to social

pressures.9

Given that social premiums are pay in excess of firm performance, it is useful to identify

which boards award social premiums to their CEOs. We examine how firms with different

governance characteristics respond to social pressures and the corresponding effect on the

magnitude of social premiums. We find mixed evidence using eight conventional corporate

governance measures: high social premiums are granted to CEOs at firms with high block

ownership, smaller boards, and low GIM index (all of which are proxies for good corporate

governance). On the other hand, high social premiums also exist at firms with a high fraction of

inside directors (a proxy for poor corporate governance). These seemingly conflicting

governance mechanisms could be reconciled because a board with more insiders has strong local

roots. More importantly, a board with more connections to the CEO does not grant the CEO a

higher social premium. Overall, we show that social premiums are not higher at firms with weak

corporate governance. As modeled by Acharya and Volpin (2010), in a labor market with scarce

managerial talent, even well-governed firms have to conform to the social norm in compensating

the CEOs if competing firms are doing the same.

One could argue that the link between CEO pay and the number of social peers may be

driven by factors omitted from our empirical specifications. To address this concern, all of our

empirical specifications include year fixed effects to capture time trend and industry fixed effects

to capture time-invariant and industry-specific characteristics. Further, our results hold when we

examine the link between the change in the social circle size and the subsequent change in CEO

pay. Moreover, we show that the effect of social pressures on CEO pay exists in various social

circles.

Our research contributes to the finance literature by applying concepts in sociology,

especially the dependence of happiness on income relative to the reference group and the

influence of social pressures, to research on executive compensation. Our research complements

(1) Kedia and Rajgopal (2009), who document the effect of local companies on the grants of

stock options to rank and file workers due to labor market competition; (2) Hwang and Kim

(2009), who show that firms with both conventionally and socially independent boards exhibit

lower CEO pay, higher pay performance sensitivity, and stronger turnover performance

9 Walter Isaacson discusses the anti-social trait of narcissists in his book “Steve Jobs.”

5

sensitivity;10

(3) Bizjak, Lemmon, and Naveen (2008), who focus on the influence of industry-

size peers on CEO compensation; and (4) Faulkender and Yang (2010) and Bizjak, Lemmon, and

Nguyen (2011), who show the selection bias of compensation peer companies and its influence

on CEO compensation.

Our research differs from concurrent papers by Bouwman (2009), who suggests that CEO

pay regresses toward the average pay in the local area and attributes this to envy; Francis, Hasan,

John, and Waisman (2008), who examine the effect of geographic locations (urban, small city,

and rural) on pay for performance of CEOs and attribute the variation in pay performance

sensitivity to monitoring costs and competition in the local labor market;11

and Knyazeva,

Knyazeva, and Masulis (2012), who study the effects of local director labor market on the board

structure of nearby firms. Looking into the social lives of CEOs, we examine the effect of social

pressures from various groups of social peers on CEO compensation. Social pressures could

provide an explanation as to why highly paid CEOs believe they deserve even higher pay and

why strong boards endorse it, rather than simply attributing the behavior to greed.

The paper proceeds as follows. Section 1 describes the data and develops the empirical

strategy. Section 2 presents the results of multivariate regressions. Section 3 analyzes alternative

sources of social pressures. Section 4 examines the effect of CEO personal traits and corporate

governance on social premiums and Section 5 concludes.

1. Data, preliminary analysis, and empirical strategy

In this section, we describe the data, conduct a preliminary analysis, and state the main

empirical strategy for the multivariate analysis. Our sample contains the Standard and Poor’s

(S&P) 1500 companies between 1994 and 2005. The S&P 1500 companies are comprised of the

S&P 500, S&P Mid Cap 400, and S&P Small Cap 600 companies. We use the historical S&P

1500 indices to identify sample firms.12

10

Previous studies on the effect of “social comparison” on executive pay are mainly concerned with the directors’

network; see, for example, Larcker, Richardson, Seary, and Tuna (2005), Kovacevic (2005), O’Reilly, III., Main,

and Crystal (1988), Barnea and Guedj (2007), Hwang and Kim (2009), and Engelberg, Gao, and Parsons (2012). 11

Yonker (2011) stresses the geographic preference of CEOs and the difference in performance and pay between

local and non-local CEOs. Even though the labor market for rank and file workers is segmented by geographic

locations; as shown in Kedia and Rajgopal (2009), we believe the labor market for CEOs is not. 12

Our results are robust to using the S&P 500, S&P Mid Cap 400 and S&P Small Cap 600 index components as

defined by Standard & Poor’s in 2005.

6

1.1 Variable descriptions

Our pay determination model includes the following pay determinants identified by

existing research: (1) stock and accounting performance; (2) complexity and risks of managerial

tasks (size, market-to-book, growth, and risks); (3) corporate governance (whether the CEO

serves as the chairman of the board, CEO tenure, the percentage ownership of blockholders,

institutions and insiders; the number of directors, the percentage of inside directors, the GIM

index, and prior connections between the CEO and directors); (4) local economic environment

(returns of local stocks in excess of market returns and the cost of living index at the

Metropolitan Statistical Area, MSA, level); and (5) social variables (the number of S&P 1500

CEOs, Forbes 400 people, and social elites in the local area; the luxury home value in the MSA;

the number of the CEO’s prominent alumni; the number of non-profit organization boards on

which the CEO serves; and the CEO’s narcissism score). We refer to the variables in groups (1)

and (2) as the economic variables.

Compensation variables are from the ExecuComp database: the ex-ante total pay (TDC1)

includes salary, bonuses, other annual compensation, total value of stock options and restricted

stock granted during the year, long-term incentive payout, and other compensation. Share price

information is from the University of Chicago’s Center for Research in Security Prices (CRSP).

Company financial and accounting information is from the Standard and Poor’s Compustat

database. Historical locations of corporate headquarters are found using historical zip codes,

provided by Compact Disclosure. These zip codes are then linked to the latitudes and longitudes

at http://www.census.gov/geo/www/gazetteer/places2k.html. The ACCRA cost of living indexes

of each year are provided by the Council for Community and Economic Research

(www.coli.com). The sources for governance and director variables include the Investor

Responsibility Research Center (IRRC), Corporate Proxy, and Compact Disclosure.

The number of the CEO’s prominent alumni, non-profit board seats, and prior

connections to directors via work, non-profit and education are derived from the BoardEx

database. Individuals included in the Forbes 400 list in each year of our sample period are

assigned latitude and longitude positions based on the state and city information provided by

Forbes; then each Forbes 400 individual is assigned to the 60-mile radius of the corporate

headquarters. IRS top wealth holder data are provided by the IRS in 1998

(http://www.irs.gov/pub/irs-soi/98pwart.pdf). Home locations of social elites are found via zip

7

codes of all people listed in the Social Register, 2004 Edition. Luxury home values by MSA are

provided by a private source that also provided the data to Business Week.

1.2 Preliminary analysis

Figure 1 plots the average level of CEO pay (TDC1 in the ExecuComp database) in a

social circle against the size of the circle measured by the number of local CEOs. Even though

there are fluctuations in the average CEO pay as the size of the social circle increases, the

positive correlation between the two is clearly visible.

Table 1 provides descriptive statistics for variables used in the analysis. Panel A

summarizes compensation variables. The average and median of total annual compensation for

our sample CEOs are $5.009 million and $2.649 million, respectively. Panel B lists nine

variables regarding CEO social circles. Column 1 describes our primary measure of the social

circle size: the number of S&P 1500 firms headquartered with 60 miles of the firm’s

headquarters (local CEOs). The count includes the firm itself. The average number of local

CEOs is 59.9, the median is 45, and the 25th

and 75th

percentiles are 15 and 79, respectively. The

largest social circle is in the MSA of New York-Northern New Jersey-Long Island (NY-NJ-PA),

which contains 157 of the S&P 1500 firms.13

There are 262 CEOs who have no peer CEOs

within the 60-mile radius (for example, both Bismarck, ND and Tupelo, MS have only one of the

S&P 1500 firms). Column 2 shows the year-to-year changes of the number of local CEOs due to

adjustments of the S&P index components (including the addition of the Small Cap 600 firms to

the S&P index in October, 2004, as well as addition and deletion of firms due to changes in

market capitalization and liquidity, mergers, acquisitions, bankruptcies, and privatizations) and

relocations of corporate headquarters.14

Column 3 of Panel B reports the number of Forbes 400 people who live within 60 miles

of the firms’ headquarters. Column 4 describes the number of prominent alumni who attended

the same college with the CEO around the same time and are present in the BoardEx database as

13

http://www.census.gov/econ/census/snapshots_center/ny.html 14

In our sample of S&P 1500 firms during 1994-2005, only 157 firms moved their corporate headquarters more than

30 miles. Of the 157 firms, 90 firms went through mergers and acquisitions within a year. Out of the remaining 67

firms, 20 appointed new CEOs in the year of the headquarters relocation.

8

officers or directors of public firms, private companies or non-profit organizations. Column 5

counts the number of non-profit organizations on which the CEO severs as a director or officer.15

Column 6 of Panel B reports the number of social elites who live within 60 miles of the

company’s headquarters. Social elites include those who inherited wealth, top executives and

former top executives, of whom very few are current CEOs of S&P 1500 firms; see the 2004

Social Register published by the Social Register Association in New York. Column 7 reports the

number of top wealth holders in the state of the firm’s headquarters. It is provided by the IRS in

1998 (count of individuals with wealth above $1 million).16

Column 8 reports the value of luxury

homes (the 99th

percentile of home values in the CEO’s MSA).17

This variable, different from the

cost of living index, is more relevant for social comparisons especially those with people in the

local area and is thus closely related to social premiums in CEO pay.

Column 9 of Panel B describes the narcissism score of a CEO based on the number of

persons in a photo and the size of the photo included in the annual report (Chatterjee and

Hambrick 2007). The narcissism score is 4 if the CEO is the only person in a photo that covers a

whole page in the annual report; 3 if the CEO has a solo photo that covers less than a page; 2 if

other officers or directors are present in the same photo with the CEO or in other photo(s) on the

same page; and 1 if the CEO does not have a photo in the annual report. For our sample CEOs,

the median narcissism score is 2.5, in between Michael Dell (score of 2) and Bill Gates (score of

3). Narcissists believe that they deserve high pay as a proper recognition of their superior ability.

At the same time, they are somewhat anti-social and are thus less likely to be exposed to social

pressures. A few of the nine social variables are highly correlated.18

Thus in the empirical

specifications, we orthogonalize different social variables to capture the incremental effect on

CEO compensation of each social venue.

15

For the number of alumni and the number of non-profit boards, we replace missing counts by zero in our

regression analysis. Results are similar if we use the subsamples with non-missing values. 16

Our results are similar if we use the number of top wealth holders by state in 1995. 17

In our sample, the mean and median of luxury home values in all MSAs are $1.10 million and $0.87 million,

respectively; these values are $1.41 million and $1.06 million, respectively, in 2005. These values are lower than

$2.3 million, the median market value of the main residences for S&P 500 CEOs in late 2006 (See Liu and

Yermack, 2007). Considering that our sample includes CEOs of S&P 500, Mid Cap 400, as well as Small Cap 600

firms and that the price in the housing market went up during our sample period, we believe luxury home values in

the MSA could serve as a proxy for the values of luxury homes in the local area to which CEOs, social elites, and

their spouses pay attention. Moreover, for a subsample of 523 CEOs (Cronqvist, Makhija, and Yonker, 2012) that

we have the purchase prices of their homes, the mean and median values of CEO homes are $1.68 million and $1.11

million, respectively. 18

All but one correlation among social variables are lower than 0.6. The correlation between the number of S&P

1500 CEOs and the number of Forbes 400 people in the local area is the exception.

9

Panel C of Table 1 summarizes traditional pay determinants such as firm performance,

risk, and complexity of business. It also contains economic conditions such as the cost of living

index given by MSA and excess returns of local stocks, as measured by the value-weighted

return (TRS1YR) of all companies headquartered within 60 miles of the firm’s headquarters less

the CRSP value-weighted monthly market return (VWRETD). In our regressions on social

premiums, we control for these two local variables to show that social premiums in CEO

compensation do not merely reflect pay adjustments for different living standards in different

areas.

Panel D describes eight corporate governance measures previously shown to affect CEO

compensation (Core, Holthausen, and Larcker 1999; Bebchuk and Cohen 2005). We also add the

total number of connections between the CEO and directors of the company via education, work,

or services for non-profit organizations (Engelberg, Gao, and Parsons 2012; Nguyen 2011;

Hwang and Kim 2009).19

1.3 Empirical strategy

Our multivariate analyses examine the effect of social pressures on social premiums in

CEO compensation. The baseline model has two groups of variables: the size of the social circle,

a proxy for social pressures; and firm characteristics.

Ln (TDC1)

= f (Ln(number of local CEOs), market-to-book, (ROA), (stock return), Ln(sales), ROA,

lagged ROA, stock return, lagged stock return).

This specification is in line with the economic model for executive pay (Core,

Holthausen, and Larcker 1999; and Murphy 1999) in which CEOs are compensated for stock and

accounting performance, for managing complex operations, and for taking risks and generating

growth. We winsorize CEO compensation and the number of local CEOs at the 1st and 99

th

percentiles, then take a log transformation of each to overcome the skewness in the data.

Economically, the coefficient estimate of Ln(number of local CEOs) measures the elasticity of

CEO pay to social circle size.

19

All missing counts on CEO and director connections are replaced with zero in the regression analyses. Our results

do not change if we use the subsample with non-missing values.

10

We then add corporate governance variables and local economic variables, as described

in Section 1.1, to this baseline model. It is critical to filter out the portion of CEO compensation

adjusted for the local living standard before attributing CEO compensation to pressures from

local social peers. We include indicators for the Fama-French 49 industry classifications in all

regressions. Because the sample contains panel data over 12 years, we cluster standard errors at

the firm level (Petersen 2009) and add year dummy variables in all regressions. In the robustness

tests, we add state fixed effects to account for the effect of time-invariant and state-specific

characteristics that are omitted in the specifications.

2. Empirical Results

In this section, we focus on the effect of one social circle: local CEOs. We first show that

the positive link between CEO pay and the number of local CEOs depicted in Figure 1 continues

to hold in multivariate regression analyses. The number of S&P 1500 companies whose

headquarters are located within 60 miles of the headquarters of the CEO’s firm measures the size

of the social circle and serves as a proxy for social pressures. Table 2 summarizes our main

empirical findings: CEO compensation increases with the number of local CEOs after controlling

for other pay determinants; that is, we show that the social premium exists.

There are four specifications, each of which uses the ex-ante total annual pay (Ln(TDC1))

as the dependent variable and includes an expanded set of explanatory variables. Column 1

reports the results using the number of local CEOs and a set of economic variables as

explanatory variables. The coefficient estimate of Ln(number of local CEOs) has the predicted

positive sign and is statistically significant at better than 1%. Not surprisingly, CEOs of larger

firms and firms with higher risks, higher growth and better performance receive higher pay.

Column 2 adds eight corporate governance variables, seven of which are statistically

significant at better than 10%. CEO compensation is higher at firms in which the CEO chairs the

board, institutional shareholders have higher ownership, the board is larger, and the GIM index is

higher. CEO compensation is lower at firms in which block holders and insiders have higher

ownership, and the CEO has been at the post longer. These findings are consistent with the

existing literature on executive compensation such as Core, Holthausen, and Larcker (1999),

Hartzell and Starks (2003), and Bizjak, Lemmon, and Naveen (2008).

11

Two local variables added in Column 3 measure local economic conditions that may

affect the level of CEO compensation: the cost of living index in the MSA and the excess returns

of local stocks. The coefficient of the former is positive and significant at the 5% level. This

indicates that CEO compensation is adjusted for local economic conditions.20

More importantly,

Ln(number of local CEOs) is significant at better than 1%, suggesting the social premium goes

beyond compensating CEOs for different living standards in different geographic areas.

Economically, the average social premium for a CEO in a social circle with 79 CEOs (the 75th

percentile of social circles) is $0.555 million higher than the average social premium for a CEO

in a social circle with 15 CEOs (the 25th

percentile of social circles).21

This pay increase

corresponds to 11% and 21%, respectively, of the mean and median of the total annual pay for

our sample CEOs.22

Column 4 adds indicators for firms in the S&P 500 index and firms in the S&P Mid Cap

400 index as well as their interactions with Ln(number of local CEOs). This specification is

designed to investigate whether CEOs of large firms are under greater social pressures. We find

that social premiums appear to be higher for CEOs at the S&P 500 firms, but the difference is

not statistically significant.

We then rerun the regression of CEO pay on the number of local CEOs using three

alternative pay measures: salary, salary and bonuses, and the ex-post total pay (TDC2, which is

same as TDC1 except we replace the value of options granted with the value of options exercised

during the year). 23

As shown in Table 3, the social premium exists for all components of CEO

compensation and is stronger for equity-based pay.

20

Our results are robust to using housing price indices by MSA, provided by the Office of Federal Housing

Enterprise Oversight (OFHEO). 21

The average pay for S&P 1500 CEOs in a social circle with 15 CEOs is $3.908 million. The predicted average pay

for S&P 1500 CEOs in a social circle with 79 CEOs is calculated as follows: Ln(pay(79)) – Ln(pay(15)) =

0.0799*(Ln(79) – Ln(15)), where the value of 0.0799 is obtained from Column 3 of Table 2. Thus, pay(79) =

3.908*Exp(0.0799*Ln(79/15)) = $4.463 million. This is higher than the average compensation for CEOs in circles

with 15 CEOs by 4.463 – 3.908 = $0.555 million, all else equal. 22

The social premium also exists if we use the number of local CEOs in the previous year as the main explanatory

variable. Our interpretation is as follows. A CEO learns from either public sources or face-to-face interactions with

other local CEOs about what level of pay is needed to maintain or improve social ranking. In those cases, the desired

pay packages are implemented the following year. In many other cases, the CEO could form the pay expectation

early on through either communicating directly with local peer CEOs or shared compensation consulting firms. In

those cases, CEOs can influence their own pay packages in the contemporaneous year. 23

Even though the board has direct influence over the level of ex-ante total pay (TDC1), the ex-post total pay

(TDC2) is highly correlated with the ex-ante one. In addition, CEOs and their spouses may also pay attention to the

money pocketed and then consumed by their social peers. Thus, social premiums also exist when CEO

compensation is measured ex post.

12

Next, we examine how geographic distance between CEOs and their social peers affects

the frequency of social interactions and thus the intensity of social pressures. We expect the

strength of social pressures to decline as the geographic distance exceeds that for a practical day

trip. According to Urry (2007), the average distance of daily travels for Americans is about 30

miles. Therefore, we count respectively the number of peer CEOs in the 30 mile, 30–60 mile,

and 60–120 mile radius. The results presented in Table 4 show that the impact of social pressures

on CEO compensation is the highest for social circles within 30 miles, is much weaker (reduced

by 45%) for social circles between 30 and 60 miles, and disappears completely beyond 60 miles.

These results are consistent with the premise that CEOs attend social events within a practical

distance on a regular basis and thus are under greater influences from peers in these close circles.

The decreasing magnitude of social premiums over geographic distance helps us further address

the potential issue of omitted local variables such as weather; culture; proximity to suppliers,

customers, and prestigious universities; and access to the airport, seaport, and major highways,

because those local factors do not change as dramatically when the distance increases from 30 to

60 miles.

The social premium associated with local CEOs retains under various additional

specifications; see results reported in Table 5. First, social premiums are not merely reflecting

the non-linear impact of costs of living, as reported in Column 1; and are robust to defining

performance relative to the industry median; see Column 2. In addition, the social premium

result survives when state fixed effects are added into the regression; see Column 3.24

More importantly, the social premium result is not driven by the largest social circles,

such as those in New York. When social circles with more than 79 local CEOs (the 75th

percentile of our sample) are excluded from the analysis, social premiums do not change; see

Column 4. Column 5 reports the results using the number of S&P 1500 CEOs in a CEO’s MSA.

Column 6 reports the influence of the average CEO pay in the CEO’s local area (self-exclusive)

on subsequent CEO pay (Bouwman 2009).25

In summary, the empirical findings reported in

Tables 2–5 are consistent with the hypothesis that social pressures from nearby CEOs affect

CEO compensation.

24

In an unreported regression, social premium related to local CEO peers exists in a specification with firm-fixed

effects. 25

The correlation between the number of local CEOs and the average of lagged pay for CEOs in the local area (self-

exclusive) is 0.54. When we keep both variables in the same regression, only the number of local CEOs retains its

statistical significance.

13

3. Other sources of social pressures

In the previous section, we establish the link between CEO compensation and the number

of local CEOs after controlling for economic, governance, and local factors. In this section, we

present other venues of social interactions that may generate pressures for elevating CEO pay.

We show that each of those social venues has its own influence on CEO pay, and local CEOs

have an influence on CEO pay beyond the influence of those other sources.

One natural question regarding the effect of local CEOs is whether locations of corporate

headquarters represent industry clustering in location choices. In addition, CEOs compare their

pay with other CEOs in the same industry regardless of whether their firms are located in close

proximity. Bizjak, Lemmon, and Naveen (2008) show that CEOs whose pay was below the

median pay of the industry-size peers in the previous year receive higher pay raises and attribute

this to competitive benchmarking in the labor market. Thus, in all empirical specifications, we

control for time-invariant and industry-specific characteristics using Fama-French 49 industry

fixed effects. Further, we directly test how the change in the number of local CEOs affects the

change in CEO pay, controlling for the effect of industry peers.

We first use the empirical specification of Bizjak, Lemmon, and Naveen (2008), adding

to our regression the change in the number of local CEOs and its interaction with an indicator for

lagging CEO pay (pay below the industry-size median level in the prior year). Next, we modify

the baseline specification in Table 2 to a change-on-change regression, incorporating the

indicator for lagging CEO pay and its interaction with ΔLn(number of local CEOs) and keeping

Ln(lagged sales) as specified by Bizjak, Lemmon, and Naveen (2008). The results reported in

Table 6 confirm that a CEO whose pay was below industry-size peers receives a higher pay raise

as the indicator variable of lagging CEO pay is positive and significant. Moreover, a CEO with

more peers in the local area also has greater pay increases. Thus, both industry peers and local

CEOs affect CEO pay. Those two sources of pressures do not interact with each other, as

indicated by the insignificant loading on the interaction term.

Beyond other CEOs of large companies in the local area, a CEO may also socialize with

other nearby prominent and wealthy people. One such social circle is the superrich people

included in the list of the Forbes 400 who live within 60 miles of the company’s headquarters.

Some of the Forbes 400 people are themselves CEOs or former CEOs. We first examine the

14

individual effect of each social circle (local CEOs vs. local Forbes 400 people), then

orthogonalize one social circle to the other; finally, we interact the two circles by examining

whether a CEO with more surrounding Forbes 400 people faces more intense the pressure from

local CEOs. The results reported in Table 7 show that the number of local Forbes 400 people

affects CEO pay; see Column 2. The influence on CEO pay of local CEOs dominates that of

nearby Forbes 400 people, as indicated by the insignificant loading of the residual of the number

of Forbes 400 people on the number of CEOs in the local area.26

In addition to socializing with prominent local people and comparing pay with CEOs

from the same industry, a CEO may also socialize with his college classmates via activities at

local alumni associations, reunions, and private events at exclusive alumni clubs such as Harvard

Club of New York City. A recent study by Shue (2011) shows the influence of MBA classmates

at Harvard Business School on executive compensation, acquisition propensities, and other

corporate decisions. Interestingly, the peer effects are more than twice as strong in the year

immediately following staggered alumni reunions. To investigate the effect of prominent alumni,

we count how many people who went to the same college as the CEO around the same time

(with overlapping years) are officers or directors of private companies, public firms, or non-

profit organizations. The more prominent classmates a CEO has the stronger the social pressures

the CEO faces because classmates are typically considered to be one’s equals. Results reported

in Table 8 confirm this hypothesis. We find that the alumni network and local CEO network are

two separate social circles: each affects CEO pay, but they do not interact with each other, as

indicated by the insignificant loading on the cross term in Column 5. The conclusion is the same

using the maximum or average wealth level of the CEO’s prominent classmates, but the sample

size is dramatically reduced due to the lack of wealth information.

CEOs that choose to serve on multiple non-profit organizations might be more concerned

about their social status. Non-profit organizations also provide those CEOs venues to display

wealth or compare wealth with a different set of wealthy people via offering their own homes or

being invited to other homes for charity functions, and competing for largest charitable

26

The average pay for S&P 1500 CEOs in a social circle with three nearby Forbes 400 individuals (the 25th

percentile) is $4.284 million. The predicted average pay for S&P 1500 CEOs in a social circle with 25 nearby

Forbes 400 individuals (the 75th percentile) is calculated as follows: Ln(pay(25)) – Ln(pay(3)) = 0.0734*(Ln(25) –

Ln(3)), where the value of 0.0734 is obtained from Column 2 of Table 7. Thus, pay(25) is predicted to be

4.284*Exp(0.0734*Ln(25/3)) = $5.005 million. This is higher than the average compensation for CEOs in circles

with three nearby Forbes 400 individuals by 5.005 – 4.284 = $0.721 million, all else equal.

15

contributions or highest bids on auctions. Thus, CEOs serving for more non-profit organizations

have more exposures to and likely face stronger social pressures. To investigate, we count the

number of non-profit organizations at which a CEO serves as an officer or director, and analyze

its effect on CEO pay in a way similar to that of prominent alumni. The results reported in

Columns 2 and 4 of Table 9 show that a CEO who serves more non-profit organizations indeed

receives higher pay. In addition, the pressure from local CEOs elevates CEO pay beyond that

from serving on non-profit boards; see Column 3. When we keep both the number of local CEOs

and the indicator for more non-profit board seats (above sample median) in the same regression,

only the number of local CEOs retains its significance; see Column 5. The coefficient on the

cross term is insignificant, indicating that a CEO with more prominent alumni is not more

sensitive to social pressures from local CEO peers.

Table 10 reports the effects of four additional social channels through which social

pressures may affect CEO compensation. We show that the social premium associated with the

number of local CEOs remains after controlling for those alternative sources of social pressures.

First, we examine the effect of the number of local social elites27

and the number of top wealth

holders in the state on social premiums in CEO pay. According to the Conspicuous Consumption

Theory of Veblen (1934) and Frank (2000), wealthy people often use luxury homes to display

wealth and signal social status to their peers. Next, we examine the effect of the value of luxury

homes (the 99th

percentile value of homes sold in the MSA) and the value of CEO homes (for a

subsample of 523 executives who were CEOs in 2004) on social premiums. We orthogonalize

the number of local CEOs to each of those four alternative sources of social pressures and find

that each source has an influence on CEO pay, while the pressures from local CEOs elevate CEO

pay beyond these alternative sources.

4. CEO personal traits, corporate governance, and social pressures

Given that social premiums are the amount of CEO compensation in excess of that which

can be explained by firm performance, risk, governance, and local economic conditions, it is

useful to examine the demand and supply: which CEOs desire to receive and which boards are

27

Very few social elites are current CEOs. The average and median numbers of social elites in the local area are

1,356 and 272, respectively.

16

willing to grant such social premiums. More specifically, in this section we examine how CEO

personal traits and corporate governance affect the magnitude of social premiums.

First, we examine the effect of CEO personal traits on their sensitivity and response to

social pressures. In particular, we look at whether a CEO is old (older than 55, the sample

median), whether the CEO graduated from a prestigious university, and whether the CEO is a

narcissist (Chatterjee and Hambrick 2007). As shown in Table 11, young CEOs and CEOs who

did not graduate from prestigious universities receive lower compensation in general but higher

social premiums in their compensation as indicated by the negative coefficient on the interaction

term. These CEOs seem eager to establish their social status with high income, especially those

without pedigree.

Interestingly, narcissistic CEOs (with a narcissism score greater than 2.5, the sample

median), driven by a superior self-image, receive much higher total pay. However, because

narcissistic CEOs shun social interactions with people deemed inferior, which include most other

CEOs, their sensitivity to social pressures is less than a half of that of otherwise similar but non-

narcissistic CEOs. This evidence helps differentiate the social pressure theory from an alternative

one: more connected CEOs receive higher pay for their greater values to the firm (beyond what

is reflected in the past and current performance) because, the alternative theory does not predict

lower values for narcissistic CEOs.

Further, we examine which boards are more sympathetic to social pressures. We first

look at the effect of eight conventional corporate governance measures on social premiums, first

jointly, then individually. The results are reported in Table 12. Social premiums are higher at

firms with a higher block ownership, a smaller board, and a lower GIM index; each of which

indicates strong corporate governance. On the other hand, social premiums are also higher at

firms with a higher fraction of inside directors, which can be interpreted as either as an outcome

of weak corporate governance or a conformation to social norms by boards with deeper local

roots.

In addition to these conventional corporate governance measures, we test the effect of

prior connections between the CEO and directors via work, non-profit, and education

experiences. This measure captures the social dependence of the board (Hwang and Kim 2009;

Engelberg, Gao, and Parsons 2012; Nguyen 2011). The results reported in Table 13 suggest that

CEOs who are connected to directors are paid more generously, consistent with the findings in

17

the prior literature. However, their social premiums are indistinguishable from those of

unconnected CEOs. In general, the results reported in Tables 12 and 13 do not support the

conjecture that social premiums are only granted at firms with weak corporate governance. We

believe that in a labor market with scarce managerial talent, even a strong board has to grant

social premiums if competing firms are doing so (Acharya and Volpin, 2010).

4. Conclusion

“Let me tell you about the very rich. They are different from you and me.”28

It is often attributed to greed for highly paid CEOs to demand even higher pay. This

study helps us understand the phenomenon from a perspective of social interactions and

pressures from social peers. Our approach explicitly recognizes that one’s well-being, by

definition, must be measured in the context of one’s social setting. CEOs socialize with other

CEOs and social elites in their community and compare wealth through published sources as

well as visible displays of wealth. CEOs also include their industry peers and school ties in their

reference groups. They are aware of their social rankings, which depend, at least partially, on

their consumption. Thus, they are propelled to demand greater pay to secure or improve their

rankings, anticipating other CEOs will do the same.

The evidence presented in this paper suggests that the compensation for otherwise

identical CEOs varies from one location to another, not simply due to difference in living

expenses, but due to the wealth level needed to maintain the CEO’s status in the respective social

circle. If there are compelling reasons for a company’s headquarters to be located in a certain

area, the board of directors would be compelled to follow the social norm and grant the social

premium to its highly valuable CEO. However, the collective actions of the boards will

inevitably raise CEO pay year after year and accelerate the pace of the “hedonic treadmill.”

28

By F. Scott Fitzgerald in the short story “Rich Boy” in “All the Sad Young Men.”

18

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21

Figure 1: Effect of the number of local CEOs on the average total pay for S&P 1500 CEOs

The sample includes all S&P 1500 CEOs between 1994 and 2005 that have the data required for the regression

analysis in Table 2. Total pay is ExecuComp variable TDC1, expressed in 2005 dollars; a detailed definition is given

in the Appendix Table. The number of local CEOs is the number of S&P 1500 companies headquartered within 60

miles of the firm’s headquarters. This count includes the firm itself.

22

Table 1 Summary statistics

The sample in Panels A, C, and D is comprised of S&P 1500 firms between 1994 and 2005 with all of the variables needed for the regression analysis in Table 2.

The sample in Panel B is further restricted by the availability of social variables. Unless otherwise stated, samples throughout the paper exclude the year in which

the firm’s headquarters was moved over 30 miles (because the number of local CEOs is indeterminate in the relocation year). Variable definitions are given in

the Appendix Table. Throughout the paper, all compensation variables and social variables are winsorized at the 1st and 99

th percentiles of the sample.

Panel A: Compensation variables

Statistics

Total pay

(TDC1, thousands of dollars)

Salary

(thousands of dollars)

Salary and bonuses

(thousands of dollars)

Ex post total pay

(TDC2, thousands of dollars)

Average 5,009 738 1,616 5,255

SD. 6,681 395 1,826 16,464

25th

percentile 1,319 476 692 960

50th

percentile 2,649 680 1,131 1,923

75th

percentile 5,615 938 1,924 4,490

Observations 14,529 14,529 14,529 14,529

Panel B: Social variables

Statistics

Number

of local

CEOs

Year to year

in

number of

local CEOs

Number of

nearby

Forbes 400

Number of

prominent

alumni

Number of

non-profit

boards

Number of

nearby social

elites

Number of

IRS top

wealth

holders

Luxury home

value

(dollars)

CEO narcissism

score

(1–4)

Average 59.9 1.2 17.4 24.64 4.37 1,356 142.4 1,097,561 2.39

SD. 54.2 8.2 19.4 27.64 5.28 1,993 125.4 689,524 0.72

25th

percentile 15.0 -1.0 3.0 5.00 0.00 101 51.5 641,147 2.00

50th

percentile 45.0 0.0 9.0 15.00 3.00 272 85.0 867,064 2.50

75th

percentile 79.0 2.0 25.0 36.00 7.00 1,521 156.0 1,390,013 3.00

Observations 14,529 12,166 14,529 9,335 14,529 14,529 14,464 9,593 12,481

23

Table 1 continued

Panel C: Economic and local variables

Statistics

Market to

book

Sales

(millions

of dollars) ROA(%)

Stock

return

(%)

Firm risk ( ) Local factors

ROA (%)

Stock

return

(%)

Cost of living

index

Local stock

return less

market return

(%)

Average lagged

pay of local CEOs

(thousands of

dollars)

Average 3.39 5,786 4.05 15.68 3.86 39.75 117.3 10.95 5,491

SD. 8.95 15,334 11.38 49.54 7.21 19.51 33.9 26.54 3,278

25th

percentile 1.55 629 1.44 -11.78 1.03 26.66 96.5 -0.87 3,409

50th

percentile 2.24 1,585 4.28 10.05 2.18 35.13 102.8 6.43 4,892

75th

percentile 3.53 4,769 8.05 34.49 4.31 47.87 130.3 16.75 6,751

Observations 14,529 14,529 14,529 14,529 14,529 14,529 14,529 14,529 14,214

Panel D: Governance variables

Statistics

D(CEO chairs

the board)

Tenure

as CEO

(years)

% of shares

held by

blockholders

% of shares

held by

institutions

% of shares

held by

insiders

% inside

directors

Number of

directors

GIM

index

Number of CEO

and director

connections

Average 0.67 7.95 32.2 63.8 6.4 30.1 9.41 9.28 1.10

SD. 0.47 7.59 22.7 21.7 11.3 24.9 3.79 2.69 1.67

25th

percentile 0.00 3.00 14.7 50.4 0.6 14.3 7.00 7.00 0.00

50th

percentile 1.00 6.00 29.2 66.3 1.8 22.2 9.00 9.00 0.00

75th

percentile 1.00 11.00 45.8 79.8 6.9 33.3 12.00 11.00 2.00

Observations 14,529 14,529 14,529 14,529 14,529 14,529 14,529 14,529 13,362

24

Table 2 Social premiums in CEO compensation: local CEO peers

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (TDC1 is

the total annual pay in ExecuComp, expressed in 2005 dollars). D(S&P500) is an indicator variable that is set to 1 if

the firm is a member of the S&P 500 index; 0 otherwise. D(Mid Cap) is an indicator variable that is set to 1 if the

firm is a member of the S&P Mid Cap index; 0 otherwise. All other variables are defined in the Appendix Table.

Standard errors are clustered at the firm level when computing significance; t-statistics are given in parentheses

below each reported coefficient; ***, **, and * denote p-value ≤ 0.01, 0.05 and 0.10, respectively.

Dependent variable Ln(TDC1)

Social variables

Ln(number of local CEOs) 0.0912 **** 0.0913 *** 0.0799 *** 0.0625 ***

(9.20) (9.20) (7.39) (4.28)

Ln(number of local CEOs) * D(S&P500) 0.0249

(1.16)

Ln(number of local CEOs) * D(Mid Cap) 0.0114

(0.52)

D(S&P500) 0.3469 ***

(4.21)

D(Mid Cap) 0.1659 **

(2.08)

Economic variables

Market-to-book 0.0039 * 0.0033 * 0.0033 * 0.0023 *

(1.80) (1.74) (1.76) (1.65)

Firm risk (ROA) 0.0072 ** 0.0078 ** 0.0077 ** 0.0052 *

(2.30) (2.33) (2.32) (1.84)

Firm risk (stock returns) 0.0190 *** 0.0195 *** 0.0195 *** 0.0200 ***

(5.06) (5.40) (5.44) (5.61)

Ln(sales) 0.4512 *** 0.4145 *** 0.4143 *** 0.3246 ***

(46.56) (38.52) (38.53) (22.46)

ROA 0.0007 0.0009 0.0009 0.0004

(0.66) (0.75) (0.76) (0.37)

Prior year ROA 0.0017 0.0024 ** 0.0024 ** 0.0019 *

(1.48) (2.03) (2.03) (1.74)

Stock return 0.0018 *** 0.0016 *** 0.0016 *** 0.0017 ***

(10.56) (9.20) (8.95) (9.88)

Prior year stock return 0.0017 *** 0.0016 *** 0.0016 *** 0.0017 ***

(11.15) (10.34) (10.22) (11.38)

Governance variables

D(CEO chairs the board) 0.1378 *** 0.1373 *** 0.1299 ***

(5.76) (5.75) (5.51)

Tenure as CEO -0.0036 * -0.0037 * -0.0036 *

(-1.83) (-1.89) (-1.89)

% of shares held by blockholders -0.0022 *** -0.0023 *** -0.0018 ***

(-3.68) (-3.73) (-3.15)

% of shares held by institutions 0.0056 *** 0.0056 *** 0.0052 ***

(8.57) (8.59) (8.28)

% of shares held by insiders -0.0045 *** -0.0045 *** -0.0040 ***

(-4.02) (-4.02) (-3.70)

25

Table 2 continued

% inside directors 0.0000 0.0000 -0.0001

(0.00) (-0.05) (-0.33)

Number of directors 0.0081 ** 0.0080 ** 0.0057

(2.20) (2.16) (1.53)

GIM index 0.0080 * 0.0085 * 0.0049

(1.72) (1.83) (1.09)

Local variables

Cost of living index 0.0007 ** 0.0007 **

(2.06) (1.97)

Local stock return – market return 0.0002 0.0002

(0.65) (0.59)

Intercept 3.7595 *** 3.6123 *** 3.5614 *** 4.1525 ***

(24.73) (21.92) (21.13) (22.31)

Year fixed effects Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes

Adjusted R-squared 0.4747 0.4981 0.4983 0.5104

Observations 15,703 14,529 14,529 14,529

26

Table 3 Social premiums: Alternative measures of CEO compensation

The sample is comprised of S&P 1500 firms between 1994 and 2005. Salary, Salary and bonuses, and Ex-post total

pay (TDC2) are all given by ExecuComp. TDC2 is the sum of salary, bonus, the total value of restricted stock

granted, the total value of stock options exercised, long-term incentive payouts, and other compensation. TDC2

differs from the ex-ante total pay, TDC1, in that it replaces the value of stock options granted by the value of stock

options exercised during the year. All other variables are defined in the Appendix Table. Standard errors are

clustered at the firm level when computing significance; t-statistics are given in parentheses below each reported

coefficient. ***, **, and * denote p-values ≤ 0.01, 0.05 and 0.10, respectively.

27

Table 3 continued

Dependent variable Ln(Salary) Ln(Salary and bonuses) Ln(Ex-post total pay)

Social variables

Ln(number of local CEOs) 0.0369 *** 0.0486 *** 0.0703 ***

(4.28) (5.03) (5.84)

Economic variables

Market-to-book -0.0007 0.0000 0.0025

(-0.96) (0.02) (1.50)

Firm risk (ROA) -0.0003 0.0009 0.0074 **

(-0.30) (0.55) (2.41)

Firm risk (stock returns) -0.0063 *** -0.0053 ** 0.0022

(-2.88) (-2.18) (0.79)

Ln(sales) 0.1896 *** 0.2886 *** 0.3924 ***

(25.02) (31.67) (33.45)

ROA 0.0003 0.0039 *** 0.0056 ***

(0.39) (3.12) (2.57)

Prior year ROA -0.0021 *** -0.0018 ** 0.0034 **

(-3.30) (-2.23) (2.30)

Stock return 0.0002 * 0.0021 *** 0.0035 ***

(1.86) (14.56) (15.78)

Prior year stock return 0.0002 *** 0.0013 *** 0.0031 ***

(3.11) (11.30) (15.13)

Governance variables

D(CEO chairs the board) 0.1040 *** 0.1332 *** 0.1605 ***

(6.24) (6.76) (6.34)

Tenure as CEO 0.0078 *** 0.0071 *** 0.0091 ***

(6.38) (4.53) (4.43)

% of shares held by blockholders -0.0001 -0.0006 -0.0026 ***

(-0.24) (-1.42) (-4.10)

% of shares held by institutions 0.0019 *** 0.0026 *** 0.0047 ***

(4.42) (5.32) (7.08)

% of shares held by insiders -0.0023 *** -0.0026 *** -0.0042 ***

(-3.35) (-3.18) (-3.72)

% inside directors 0.0004 0.0004 -0.0002

(1.40) (1.18) (-0.47)

Number of directors 0.0065 ** 0.0102 *** 0.0064

(2.30) (3.16) (1.57)

GIM index 0.0087 *** 0.0067 * 0.0042

(2.73) (1.87) (0.84)

Local variables

Cost of living index -0.0001 0.0006 * 0.0008 **

(-0.27) (1.74) (1.99)

Local stock return – market return -0.0001 -0.0003 0.0001

(-0.84) (-1.26) (0.14)

Intercept 4.7982 *** 4.3785 *** 3.6575 ***

(43.23) (38.06) (22.52)

Year fixed effects Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes

Adjusted R-squared 0.3698 0.4853 0.4682

Observations 14,529 14,529 14,529

28

Table 4 Geographic distance of local CEO peers

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total

annual pay in ExecuComp, expressed in 2005 dollars). The number of nearby CEOs is the number of S&P 1500

CEOs within 30 miles (self-exclusive), 30-60 miles, and 60-120 miles of the headquarters location of the firm,

respectively. All other variables are defined in the Appendix Table. Standard errors are clustered at the firm level

when computing significance; t-statistics are given in parentheses below each reported coefficient. ***, **, and *

denote p-values ≤ 0.01, 0.05 and 0.10, respectively.

29

Table 4 continued

Geographic distance of peer CEOs to the firm’s headquarters

Sample Description Within 30 miles In 30-60 miles In 60-120 miles

Social variable

Ln(1+number of nearby CEOs) 0.0795 *** 0.0437 *** -0.0001

(7.89) (4.60) (-0.01)

Economic variables

Market-to-book 0.0033 * 0.0034 * 0.0035 *

(1.77) (1.78) (1.81)

Firm risk (ROA) 0.0076 ** 0.0080 ** 0.0081 **

(2.28) (2.37) (2.39)

Firm risk (stock returns) 0.0192 *** 0.0205 *** 0.0204 ***

(5.39) (5.54) (5.50)

Ln(sales) 0.4120 *** 0.4197 *** 0.4209 ***

(38.47) (38.74) (38.89)

ROA 0.0009 0.0009 0.0009

(0.75) (0.74) (0.73)

Prior year ROA 0.0024 ** 0.0024 ** 0.0024 **

(2.04) (2.07) (2.05)

Stock return 0.0016 *** 0.0016 *** 0.0015 ***

(8.92) (8.93) (8.78)

Prior year stock return 0.0016 *** 0.0016 *** 0.0016 ***

(10.11) (10.19) (9.95)

Governance variables

D(CEO chairs the board) 0.1393 *** 0.1359 *** 0.1378 ***

(5.84) (5.64) (5.69)

Tenure as CEO -0.0039 ** -0.0037 * -0.0037 *

(-2.00) (-1.86) (-1.86)

% of shares held by blockholders -0.0023 *** -0.0023 *** -0.0022 ***

(-3.79) (-3.76) (-3.64)

% of shares held by institutions 0.0056 *** 0.0057 *** 0.0058 ***

(8.58) (8.81) (8.79)

% of shares held by insiders -0.0044 *** -0.0045 *** -0.0045 ***

(-3.88) (-4.05) (-3.97)

% inside directors 0.0000 -0.0001 -0.0001

(0.07) (-0.29) (-0.14)

Number of directors 0.0082 ** 0.0071 * 0.0074 **

(2.24) (1.92) (1.99)

GIM index 0.0085 * 0.0088 * 0.0082 *

(1.85) (1.90) (1.77)

Local variables

Cost of living index 0.0009 *** 0.0012 *** 0.0023 ***

(2.62) (3.34) (6.60)

Local stock return – market return 0.0002 0.0003 0.0004

(0.62) (1.21) (1.45)

Intercept 3.6036 *** 3.6300 *** 3.5869 ***

(20.71) (21.62) (20.31)

Year fixed effects Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes

Adjusted R-squared 0.4994 0.4953 0.4931

Observations 14,529 14,529 14,529

30

Table 5 Robustness tests on social premiums

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total annual pay in ExecuComp, expressed in 2005

dollars). Ln(number of local CEOs) is the number of S&P 1500 firms headquartered within 60 miles of the headquarter location of the CEO’s firm. Ln(number of

CEO peers in the MSA) is the number of S&P1500 firms headquartered in the Metropolitan Statistical Area (MSA) of the headquarter location of the CEO’s

firm. Ln(average lagged pay of local CEOs) is the average of the ex-ante total pay (TDC1) of CEOs whose headquarters are located within 60 miles of the firm’s

headquarters. This pay variable is lagged by one year and the calculation leaves out the CEO of interest. Economic and governance variables are the same as

those in Table 2. All other variables are defined in the Appendix Table. Alternative economic variables are the same as the economic variables included in Table

2 except that ROA and prior year ROA are replaced by the industry-adjusted values of the corresponding variables. Industry-adjusted ROA is firm ROA minus

the median value of ROA for the firm’s Fama-French 49 industry classifications. Standard errors are clustered at the firm level when computing significance; t-

statistics are given in parentheses below each reported coefficient. ***, **, and * denote p-values ≤ 0.01, 0.05 and 0.10, respectively.

31

Table 5 continued

Sample description

Enhanced control

for the cost of

living

Industry

adjusted ROA State fixed effects

Excluding social

circles with more

than 79 local CEOs

Using number of

CEO peers in the

MSA

Using average lagged

pay of local CEOs

(self-exclusive)

Social variables

Ln(number of local CEOs) 0.0777 *** 0.0800 *** 0.0691 *** 0.0722 ***

(6.70) (7.40) (4.85) (5.52)

Ln(number of CEO peers in the MSA)

0.0537 ***

(5.53)

Ln(average lagged pay of local CEOs)

0.1108 ***

(4.78)

Economic variables (see Table 2) Yes No Yes Yes Yes Yes

Alternative economic variables No Yes No No No No

Governance variables (see Table 2) Yes Yes Yes Yes Yes Yes

Local variables

Cost of living index 0.0021 0.0007 ** 0.0002 0.0013 0.0014 *** 0.0015 ***

(0.95) (2.04) (0.49) (1.47) (4.05) (4.26)

Square of the cost of living index -0.0000

(-0.64)

Local stock return – market return 0.0002 0.0002 -0.0001 -0.0002 0.0003 0.0004

(0.65) (0.67) (-0.44) (-0.78) (1.10) (1.29)

Intercept 3.4697 *** 3.5747 *** 3.7055 *** 3.4493 *** 3.5893 *** 2.8881 ***

(15.35) (21.32) (23.41) (17.38) (20.52) (12.43)

Year fixed effects Yes Yes Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes Yes Yes

State fixed effects No No Yes No No No

Adjusted R-squared 0.4984 0.4982 0.5083 0.4912 0.4969 0.4909

Observations 14,529 14,529 14,529 10,897 14,529 14,214

32

Table 6 Industry peers and social premiums

The sample is comprised of S&P 1500 firms between 1994 and 2005. Total pay is TDC1 (total annual pay in

ExecuComp, expressed in 2005 dollars). The number of local CEOs is the number of S&P1500 firms headquartered

within 60 miles of the firm’s headquarters. Column 1 follows the specification of Bizjak, Lemmon, and Naveen

(2008) (BLN) in which the dependent variable is the change in the dollar value of total pay ( total pay); D(low

comp) is defined as in BLN. We first sort firms into industries by the two-digit SIC code, then within each industry

we sort firms into two groups by sales in the previous year. D(low comp) is set to 1 for CEOs whose pay in the

previous year was below the median pay of their industry-size peers. We add to the specification the change in the

number of local CEOs and its interaction term with D(low comp). Net income before extraordinary items is

Compustat data237. The regression in Column 2 is a modification of our empirical specification in Table 2. The

dependent variable is Ln(total pay), and we add D(low comp) and its interaction term. In the regression, we use

changes in social, economic, and local variables; and levels of governance variables. total pay, Ln(total pay),

number of local CEOs, and Ln(number of local CEOs) are all winsorized at the 1st and 99

th percentiles of the

sample. All remaining variables are defined in the Appendix Table. Standard errors are clustered at the firm level

when computing significance; t-statistics are given in parentheses below each reported coefficient; ***, **, and *

denote p-value ≤ 0.01, 0.05 and 0.10, respectively.

Dependent variable total pay Ln(total pay)

Social variables

number of local CEOs 17.7471 *

(1.93)

number of local CEOs * D(low comp) -16.0074

(-1.48)

Ln(number of local CEOs) 0.1758 ***

(2.98)

Ln(number of local CEOs)* D(low comp) -0.0610

(-0.83)

Economic variables

D(low comp) 1693.6222 *** 0.4129 ***

(20.64) (28.34)

Ln(lagged sales) 126.9389 *** 0.0300 ***

(5.51) (7.32)

sales 0.1393 ***

(4.56)

net income before extraordinary items 0.0479

(0.69)

Market value of equity 0.0312 ***

(2.71)

Market-to-book 0.0001

(0.15)

Firm risk (ROA) -0.0011

(-0.44)

Firm risk (stock returns) 0.0014

(0.34)

Ln(sales) 0.3481 ***

(10.26)

ROA 0.0023 *

(1.88)

Prior year ROA 0.0018 *

(1.69)

33

Table 6 continued

Stock return 0.0009 ***

(6.78)

Prior year stock return 0.0009 ***

(8.38)

Governance variables

D(CEO chairs the board) 0.0711 ***

(5.85)

Tenure as CEO 19.7151 *** 0.0015 **

(4.91) (2.40)

% of shares held by blockholders -0.0013 ***

(-4.84)

% of shares held by institutions 0.0011 ***

(3.98)

% of shares held by insiders -0.0009 *

(-1.80)

% inside directors 0.0004

(1.33)

Number of directors 0.0033 *

(1.89)

GIM index -0.0004

(-0.20)

Local variables

Cost of living index 0.0003

(1.01)

Local stock return – market return -0.0002

(-1.16)

Intercept -1934.9 *** -0.5488 ***

(-10.73) (-12.03)

Adjusted R-squared 0.0468 0.1264

Observations 13,739 11,700

34

Table 7 Nearby Forbes 400 individuals and social premiums

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total

annual pay in ExecuComp, expressed in 2005 dollars). The number of nearby Forbes 400 is the number of people

who is included on the list of Forbes 400 and live within 60 miles of the firm’s headquarters. Residual of Ln(number

of nearby Forbes 400) on Ln(number of local CEOs) is the error term in a regression of Ln(number of nearby

Forbes 400) on Ln(number of local CEOs). Residual of Ln(number of local CEOs) on Ln(number of nearby Forbes

400) is defined similarly. D(more nearby Forbes 400) is an indicator variable set to 1 if the number of nearby Forbes

400 individuals is greater than or equal to the sample median; and 0 otherwise. All remaining variables are defined

in the Appendix Table. Standard errors are clustered at the firm level when computing significance; t-statistics are

given in parentheses below each reported coefficient; ***, **, and * denote p-value ≤ 0.01, 0.05 and 0.10,

respectively.

Dependent variable Ln(TDC1)

Social variables

Ln(number of local CEOs) 0.0799 *** 0.0817 *** 0.0616 ***

(7.39) (7.45) (3.96)

Ln(number of nearby Forbes 400) 0.0734 *** 0.0747 ***

(6.53) (6.68)

Residual of Ln(number of nearby Forbes

400) on Ln(number of local CEOs)

0.0159

(0.79)

Residual of Ln(number of nearby CEOs) on

Ln(number of nearby Forbes 400)

0.0674 ***

(3.45)

D(more nearby Forbes 400) -0.1640

(-1.09)

Ln(number of local CEOs) *

D(more of nearby Forbes 400)

0.0515

(1.38)

Economic variables

Market-to-book 0.0033 * 0.0034 * 0.0033 * 0.0033 * 0.0033 *

(1.76) (1.76) (1.76) (1.76) (1.75)

Firm risk (ROA) 0.0077 ** 0.0076 ** 0.0077 ** 0.0077 ** 0.0076 **

(2.32) (2.30) (2.31) (2.31) (2.29)

Firm risk (stock returns) 0.0195 *** 0.0195 *** 0.0195 *** 0.0195 *** 0.0196 ***

(5.44) (5.51) (5.45) (5.45) (5.48)

Ln(sales) 0.4143 *** 0.4149 *** 0.4140 *** 0.4140 *** 0.4142 ***

(38.53) (38.47) (38.54) (38.54) (38.49)

ROA 0.0009 0.0008 0.0009 0.0009 0.0008

(0.76) (0.69) (0.74) (0.74) (0.72)

Prior year ROA 0.0024 ** 0.0023 ** 0.0024 ** 0.0024 ** 0.0024 **

(2.03) (1.99) (2.02) (2.02) (2.01)

Stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(8.95) (8.89) (8.95) (8.95) (8.99)

Prior year stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(10.22) (10.19) (10.23) (10.23) (10.28)

35

Table 7 continued

Governance variables

D(CEO chairs the board) 0.1373 *** 0.1356 *** 0.1369 *** 0.1369 *** 0.1371 ***

(5.75) (5.65) (5.73) (5.73) (5.75)

Tenure as CEO -0.0037 * -0.0037 * -0.0037 * -0.0037 * -0.0037 *

(-1.89) (-1.87) (-1.88) (-1.88) (-1.88)

% of shares held by blockholders -0.0023 *** -0.0023 *** -0.0023 *** -0.0023 *** -0.0023 ***

(-3.73) (-3.74) (-3.74) (-3.74) (-3.77)

% of shares held by institutions 0.0056 *** 0.0056 *** 0.0056 *** 0.0056 *** 0.0056 ***

(8.59) (8.65) (8.59) (8.59) (8.64)

% of shares held by insiders -0.0045 *** -0.0045 *** -0.0045 *** -0.0045 *** -0.0045 ***

(-4.02) (-4.04) (-4.02) (-4.02) (-4.04)

% inside directors 0.0000 0.0000 0.0000 0.0000 0.0000

(-0.05) (-0.05) (-0.05) (-0.05) (-0.11)

Number of directors 0.0080 ** 0.0083 ** 0.0081 ** 0.0081 ** 0.0080 **

(2.16) (2.24) (2.20) (2.20) (2.17)

GIM index 0.0085 * 0.0095 ** 0.0087 * 0.0087 * 0.0086 *

(1.83) (2.06) (1.89) (1.89) (1.86)

Local variables

Cost of living index 0.0007 ** 0.0007 * 0.0006 * 0.0006 ** 0.0003

(2.06) (1.89) (1.74) (1.74) (0.87)

Local stock return – market return 0.0002 0.0002 0.0002 0.0002 0.0002

(0.65) (0.61) (0.59) (0.59) (0.56)

Intercept 3.5614 *** 3.6589 *** 3.5663 *** 3.6870 *** 3.6412 ***

(21.13) (21.69) (21.21) (21.94) (21.15)

Year fixed effects Yes Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes Yes

Adjusted R-squared 0.4983 0.4972 0.4984 0.4984 0.4986

Observations 14,529 14,529 14,529 14,529 14,529

36

Table 8 Alumni networks and social premiums

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total

annual pay in ExecuComp, expressed in 2005 dollars). The number of prominent alumni is the number of

individuals who went to the same college with the CEO around the same time and serve(d) as officers or directors at

private companies, public firms, and non-profit organizations covered in the BoardEx database. Residual of

Ln(number of local CEOs) on Ln(number of prominent alumni) is the error term in a regression of Ln(number of

local CEOs) on Ln(number of prominent alumni); Residual of Ln(number of prominent alumni) on Ln(number of

local CEOs) is similarly defined. D(more prominent alumni) is an indicator of 1 if the number of a CEO’s prominent

alumni is greater than or equal to the sample median value; and 0 otherwise. All remaining variables are defined in

the Appendix Table. Standard errors are clustered at the firm level when computing significance; t-statistics are

given in parentheses below each reported coefficient; ***, **, and * denote p-value ≤ 0.01, 0.05 and 0.10,

respectively.

Dependent variable Ln(TDC1)

Social variables

Ln(number of local CEOs) 0.0799 *** 0.0813 *** 0.0750 ***

(7.39) (7.52) (6.48)

Ln(number of prominent alumni) 0.0369 *** 0.0390 ***

(4.27) (4.55)

Residual of Ln(number of local CEOs)

on Ln(number of prominent alumni)

0.0782 ***

(7.22)

Residual of Ln(number of prominent

alumni) on Ln(number of local CEOs)

0.0347 ***

(4.04)

D(more prominent alumni) 0.0374

(0.57)

Ln(number of local CEOs) *

D(more prominent alumni)

0.0147

(0.85)

Economic variables

Market-to-book 0.0033 * 0.0034 * 0.0032 * 0.0032 * 0.0033 *

(1.76) (1.81) (1.76) (1.76) (1.77)

Firm risk (ROA) 0.0077 ** 0.0078 ** 0.0074 ** 0.0074 ** 0.0074 **

(2.32) (2.29) (2.22) (2.22) (2.20)

Firm risk (stock returns) 0.0195 *** 0.0203 *** 0.0194 *** 0.0194 *** 0.0195 ***

(5.44) (5.59) (5.50) (5.50) (5.48)

Ln(sales) 0.4143 *** 0.4149 *** 0.4088 *** 0.4088 *** 0.4108 ***

(38.53) (38.17) (37.91) (37.91) (38.20)

ROA 0.0009 0.0007 0.0007 0.0007 0.0008

(0.76) (0.60) (0.63) (0.63) (0.66)

Prior year ROA 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 **

(2.03) (2.05) (2.03) (2.03) (2.03)

Stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(8.95) (8.81) (8.97) (8.97) (8.96)

Prior year stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(10.22) (9.96) (10.23) (10.23) (10.23)

37

Table 8 continued

Governance variables

D(CEO chairs the board) 0.1373 *** 0.1330 *** 0.1327 *** 0.1327 *** 0.1349 ***

(5.75) (5.51) (5.57) (5.57) (5.67)

Tenure as CEO -0.0037 * -0.0036 * -0.0036 * -0.0036 * -0.0037 *

(-1.89) (-1.81) (-1.83) (-1.83) (-1.88)

% of shares held by blockholders -0.0023 *** -0.0022 *** -0.0023 *** -0.0023 *** -0.0022 ***

(-3.73) (-3.69) (-3.77) (-3.77) (-3.70)

% of shares held by institutions 0.0056 *** 0.0057 *** 0.0055 *** 0.0055 *** 0.0056 ***

(8.59) (8.72) (8.50) (8.50) (8.57)

% of shares held by insiders -0.0045 *** -0.0043 *** -0.0043 *** -0.0043 *** -0.0044 ***

(-4.02) (-3.83) (-3.88) (-3.88) (-3.97)

% inside directors 0.0000 -0.0001 0.0000 0.0000 -0.0000

(-0.05) (-0.18) (-0.09) (-0.09) (-0.07)

Number of directors 0.0080 ** 0.0069 * 0.0076 ** 0.0076 ** 0.0078 **

(2.16) (1.86) (2.04) (2.04) (2.11)

GIM index 0.0085 * 0.0075 0.0078 * 0.0078 * 0.0081 *

(1.83) (1.61) (1.68) (1.68) (1.76)

Local variables

Cost of living index 0.0007 ** 0.0022 *** 0.0007 ** 0.0007 ** 0.0007 **

(2.06) (6.64) (1.99) (1.99) (2.04)

Local stock return – market return 0.0002 0.0004 0.0002 0.0002 0.0002

(0.65) (1.32) (0.55) (0.55) (0.56)

Intercept 3.5614 *** 3.6535 *** 3.8953 *** 3.6622 *** 3.6019 ***

(21.13) (20.44) (22.39) (21.11) (21.00)

Year fixed effects Yes Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes Yes

Adjusted R-squared 0.4983 0.4951 0.5001 0.5001 0.4996

Observations 14,529 14,529 14,529 14,529 14,529

38

Table 9 Non-profit boards and social premiums

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total

annual pay in ExecuComp, expressed in 2005 dollars). Number of non-profit boards is the number of non-profit

organizations at which a CEO serves as officer or director, as defined in the BoardEx database. Residual of

Ln(number of local CEOs) on Ln(number of non-profit boards) is the error term in a regression of Ln(number of

local CEOs) on Ln(number of non-profit boards). Residual of Ln(number of non-profit boards) on Ln(number of

local CEOs) is defined similarly. D(more non-profit boards) is an indicator of 1 if the number of non-profit

organizations at which the CEO serves is greater than or equal to the sample median value; and 0 otherwise. All

remaining variables are defined in the Appendix Table. Standard errors are clustered at the firm level when

computing significance; t-statistics are given in parentheses below each reported coefficient; ***, **, and * denote

p-value ≤ 0.01, 0.05 and 0.10, respectively.

Dependent variable Ln(TDC1)

Social variables

Ln(number of local CEOs) 0.0799 *** 0.0792 *** 0.0734 ***

(7.39) (7.30) (5.21)

Ln(number of non-profit boards) 0.0663 *** 0.0651 ***

(5.04) (5.00)

Residual of Ln(number of local CEOs)

on Ln(number of non-profit boards)

0.0797 ***

(7.35)

Residual of Ln(number of non-profit

boards) on Ln(number of local CEOs)

0.0660 ***

(5.07)

D(more non-profit boards) 0.0496

(0.75)

Ln(number of local CEOs) *

D(more non-profit boards)

0.0139

(0.78)

Economic variables

Market-to-book 0.0033 * 0.0034 * 0.0033 * 0.0033 * 0.0033 *

(1.76) (1.81) (1.76) (1.76) (1.78)

Firm risk (ROA) 0.0077 ** 0.0079 ** 0.0076 ** 0.0076 ** 0.0075 **

(2.32) (2.34) (2.27) (2.27) (2.25)

Firm risk (stock returns) 0.0195 *** 0.0210 *** 0.0201 *** 0.0201 *** 0.0202 ***

(5.44) (5.59) (5.52) (5.52) (5.55)

Ln(sales) 0.4143 *** 0.4074 *** 0.4009 *** 0.4009 *** 0.4054 ***

(38.53) (36.40) (36.11) (36.11) (37.09)

ROA 0.0009 0.0009 0.0009 0.0009 0.0008

(0.76) (0.74) (0.76) (0.76) (0.71)

Prior year ROA 0.0024 ** 0.0025 ** 0.0024 ** 0.0024 ** 0.0024 **

(2.03) (2.12) (2.10) (2.10) (2.04)

Stock return 0.0016 *** 0.0015 *** 0.0015 *** 0.0015 *** 0.0015 ***

(8.95) (8.60) (8.77) (8.77) (8.81)

Prior year stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(10.22) (9.85) (10.13) (10.13) (10.14)

39

Table 9 continued

Governance variables

D(CEO chairs the board) 0.1373 *** 0.1203 *** 0.1199 *** 0.1199 *** 0.1238 ***

(5.75) (4.97) (5.02) (5.02) (5.19)

Tenure as CEO -0.0037 * -0.0038 * -0.0038 * -0.0038 * -0.0037 *

(-1.89) (-1.91) (-1.94) (-1.94) (-1.89)

% of shares held by blockholders -0.0023 *** -0.0022 *** -0.0023 *** -0.0023 *** -0.0023 ***

(-3.73) (-3.69) (-3.78) (-3.78) (-3.77)

% of shares held by institutions 0.0056 *** 0.0058 *** 0.0057 *** 0.0057 *** 0.0057 ***

(8.59) (9.04) (8.79) (8.79) (8.79)

% of shares held by insiders -0.0045 *** -0.0044 *** -0.0044 *** -0.0044 *** -0.0045 ***

(-4.02) (-3.99) (-4.03) (-4.03) (-4.10)

% inside directors 0.0000 -0.0002 -0.0001 -0.0001 -0.0001

(-0.05) (-0.35) (-0.27) (-0.27) (-0.15)

Number of directors 0.0080 ** 0.0058 0.0064 * 0.0064 * 0.0071 *

(2.16) (1.55) (1.73) (1.73) (1.91)

GIM index 0.0085 * 0.0073 0.0076 * 0.0076 * 0.0074

(1.83) (1.59) (1.65) (1.65) (1.60)

Local variables

Cost of living index 0.0007 ** 0.0023 *** 0.0008 ** 0.0008 ** 0.0008 **

(2.06) (6.98) (2.17) (2.17) (2.10)

Local stock return – market return 0.0002 0.0004 0.0002 0.0002 0.0002

(0.65) (1.51) (0.71) (0.71) (0.68)

Intercept 3.5614 *** 3.6642 *** 3.9215 *** 3.7182 *** 3.6392 ***

(21.13) (20.71) (22.77) (21.58) (20.98)

Year fixed effects Yes Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes Yes

Adjusted R-squared 0.4983 0.4960 0.5013 0.5013 0.5002

Observations 14,529 14,529 14,529 14,529 14,529

40

Table 10 Other channels of social comparisons

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total

annual pay in ExecuComp, expressed in 2005 dollars). The number of nearby social elites is the number of people

who are listed on the Social Register in 2004 and live within 60 miles of the firm’s headquarters. The number of IRS

top wealth holders is the number of high net worth people (above $1 million) in each state, estimated by the US

Internal Revenue Service (IRS) from estate tax return filings in 1998. Luxury home value is the 99th

percentile of the

values of homes sold in the MSA where the corporate headquarters is located. Purchase price of CEO home is the

purchase price of the CEO’s home (Cronqvist, Makhija, and Yonker 2012). Residual of Ln(number of local CEOs)

on Ln(number of nearby social elites) is the error term in a regression of Ln(number of local CEOs) on Ln(number

of nearby social elites). Other residual terms are similarly defined. Economic, governance, and local variables are

the same as in Table 2. Standard errors are clustered at the firm level when computing significance; t-statistics are

given in parentheses below each reported coefficient. ***, **, and * denote p-values ≤ 0.01, 0.05 and 0.10,

respectively.

Test information

Number of

Social elites

Number of

IRS top wealth

holders

Luxury home

value

Purchase price

of CEO home

Social variables

Ln(number of nearby social elites) 0.0394 ***

(5.68)

Residual of Ln(number of local CEOs) on

Ln(number of nearby social elites)

0.0702 ***

(4.43)

Ln(number of IRS top wealth holders) 0.0792 ***

(5.50)

Residual of Ln(number of local CEOs) on

Ln(number of IRS top wealth holders)

0.0670 ***

(5.54)

Ln(luxury home value) 0.1118 ***

(3.14)

Residual of Ln(number of local CEOs)

on Ln(luxury home value)

0.0496 ***

(3.00)

Ln(purchase price of CEO home) 0.1418 ***

(4.66)

Residual of Ln(number of local CEOs)

on Ln(purchase price of CEO home)

0.1098 ***

(4.00)

Economic variables (see Table 2) Yes Yes Yes Yes

Governance variables (see Table 2) Yes Yes Yes Yes

Local variables (See Table 2) Yes Yes Yes Yes

Intercept Yes Yes Yes Yes

Year fixed effects Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes

Adjusted R-squared 0.4984 0.4991 0.4446 0.4956

Observations 14,529 14,464 9,585 2,693

41

Table 11 Social premiums and CEO age, education, and narcissistic traits

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total

annual pay in ExecuComp, expressed in 2005 dollars). D(old CEO) is 1 if the CEO is 55 (the sample median of

CEO age) or older. When the CEO’s education is known, D(prestigious University) is a dummy variable set to 1 if

the CEO graduated from an Ivy League university, MIT, or Stanford University; and 0 otherwise. D(narcissist CEO)

is an indicator of 1 if the narcissism score of the CEO is above the sample median value. Narcissism score is

determined based on the number of people in a photo and the size of the photo in the firm’s annual report (Chatterjee

and Hambrick 2007). The range of the narcissism score is 1 to 4, with 4 representing a CEO with a solo photo that

covers an entire page in the annual report and 1 representing a CEO who does not have a photo in the annual report.

The sample median value of the narcissism score is 2.5. All remaining variables are defined in the Appendix Table.

Standard errors are clustered at the firm level when computing significance; t-statistics are given in parentheses

below each reported coefficient; ***, **, and * denote p-value ≤ 0.01, 0.05 and 0.10, respectively.

Dependent variable Ln(TDC1)

Social variables

Ln(number of local CEOs) 0.1066 *** 0.0912 *** 0.1082 ***

(7.72) (5.14) (7.53)

D(old CEO) 0.1252 **

(2.16)

Ln(number of local CEOs) * D(old CEO) -0.0472 ***

(-2.98)

D(prestigious University) 0.2387 **

(2.19)

Ln(number of local CEOs) *

D(prestigious University)

-0.0697 **

(-2.37)

D(narcissist CEO) 0.2581 ***

(3.99)

Ln(number of local CEOs) *

D(narcissist CEO)

-0.0576 ***

(-3.32)

Economic variables

Market-to-book 0.0034 * 0.0012 0.0034 *

(1.82) (1.30) (1.76)

Firm risk (ROA) 0.0077 ** 0.0118 ** 0.0078 **

(2.35) (2.19) (2.34)

Firm risk (stock returns) 0.0188 *** 0.0179 *** 0.0196 ***

(5.35) (2.68) (5.52)

Ln(sales) 0.4151 *** 0.3761 *** 0.4128 ***

(38.54) (19.12) (38.58)

ROA 0.0008 0.0032 0.0009

(0.68) (0.81) (0.81)

Prior year ROA 0.0024 ** 0.0037 0.0024 **

(2.01) (1.01) (2.07)

Stock return 0.0016 *** 0.0016 *** 0.0016 ***

(8.92) (4.72) (8.89)

Prior year stock return 0.0016 *** 0.0022 *** 0.0016 ***

(10.21) (8.41) (10.16)

42

Table 11 continued

Governance variables

D(CEO chairs the board) 0.1406 *** 0.1598 *** 0.1291 ***

(5.87) (4.10) (5.36)

Tenure as CEO -0.0030 -0.0016 -0.0037 *

(-1.47) (-0.59) (-1.90)

% of shares held by blockholders -0.0022 *** -0.0026 *** -0.0023 ***

(-3.64) (-2.81) (-3.79)

% of shares held by institutions 0.0055 *** 0.0055 *** 0.0055 ***

(8.48) (5.60) (8.57)

% of shares held by insiders -0.0045 *** -0.0019 -0.0045 ***

(-4.09) (-1.02) (-4.01)

% inside directors 0.0000 0.0001 0.0001

(-0.01) (0.17) (0.16)

Number of directors 0.0083 ** 0.0082 * 0.0083 **

(2.24) (1.78) (2.27)

GIM index 0.0085 * 0.0015 0.0080 *

(1.86) (0.21) (1.73)

Local variables

Cost of living index 0.0008 ** 0.0008 * 0.0007 **

(2.13) (1.90) (2.03)

Local stock return – market return 0.0001 0.0000 0.0002

(0.53) (-0.01) (0.55)

Intercept 3.4864 *** 4.0565 *** 3.4740 ***

(20.77) (15.43) (20.63)

Year fixed effects Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes

Adjusted R-squared 0.4993 0.4433 0.5001

Observations 14,503 6,309 12,481

43

Table 12 Social premiums and corporate governance

The dependent variable is Ln(TDC1) (total annual pay in ExecuComp, expressed in 2005 dollars). All eight governance variables are constructed as indicator

variables. D(CEO chairs the board) takes value of 1 if the CEO serves as the chairman of the board; and 0 otherwise. Each of the remaining seven governance

variables is an indicator of 1 if the value is greater than or equal to the corresponding sample median value; and 0 otherwise. All remaining variables are defined

in the Appendix Table. Standard errors are clustered at the firm level when computing significance; t-statistics are given in parentheses below each reported

coefficient. ***, **, and * denote p-values ≤ 0.01, 0.05 and 0.10, respectively.

Social variables (1) (2) (3) (4) (5) (6) (7) (8) (9)

Ln(number of local CEOs) {aka Ln(.)} 0.0918 *** 0.0895 *** 0.0683 *** 0.0644 *** 0.0702 *** 0.0692 *** 0.0547 *** 0.1101 *** 0.1008 ***

(3.18) (6.20) (5.37) (5.09) (5.14) (5.51) (4.67) (6.94 (5.97)

Ln(.)*D(CEO chairs the board) -0.0167 -0.0190

(-0.98) (-1.17)

Ln(.)*D(Long CEO tenure) 0.0147 0.0148

(1.04) (1.05)

Ln(.)*D(high % of block ownership) 0.0102 0.0270 *

(0.60) (1.68)

Ln(.)*D(high % of institutional ownership) 0.0121 0.0147

(0.75) (0.93)

Ln(.)*D(high % of insider ownership) -0.0022 0.0157

(-0.14) (0.93)

Ln(.)*D(high % of inside directors) 0.0301 * 0.0465 ***

(1.89) (3.09)

Ln(.)*D(more directors) -0.0328 * -0.0532 ***

(-1.83) (-3.25

Ln(.)*D(high GIM index) -0.0266 -0.0393 **

(-1.37) (-2.06)

Governance variables

D(CEO chairs the board) 0.1598 *** 0.1642 *** 0.0980 *** 0.0980 *** 0.0982 *** 0.0977 *** 0.0990 *** 0.0998 *** 0.0980 ***

(2.59) (2.77) (4.17) (4.17) (4.18) (4.15) (4.22) (4.24) (4.17)

D(Long CEO tenure) -0.0098 0.0444 ** -0.0076 0.0446 ** 0.0447 ** 0.0447 ** 0.0440 ** 0.0428 ** 0.0440 **

(-0.19) (2.35) (-0.15) (2.36) (2.36) (2.36) (2.33) (2.27) (2.32)

D(high % of block ownership) -0.1271 ** -0.0937 *** -0.0934 *** -0.1892 *** -0.0932 *** -0.0944 *** -0.0935 *** -0.0918 *** -0.0921 ***

(-2.07) (-4.10) (-4.08) (-3.25) (-4.07) (-4.13) (-4.08) (-4.01) (-4.03)

D(high % of institutional ownership) 0.1951 *** 0.2389 *** 0.2395 *** 0.2395 *** 0.1868 *** 0.2395 *** 0.2399 *** 0.2379 *** 0.2395 ***

(3.28) (9.65) (9.67) (9.67) (3.18) (9.66) (9.69) (9.62) (9.67)

D(high % of insider ownership) -0.1034 * -0.1132 *** -0.1129 *** -0.1138 *** -0.1128 *** -0.1687 *** -0.1125 *** -0.1115 *** -0.1130 ***

(-1.70) (-4.99) (-4.98) (-5.02) (-4.98) (-2.73) (-4.97) (-4.93) (-4.99)

44

Table 12 continued

(1) (2) (3) (4) (5) (6) (7) (8) (9)

D(high % of inside directors) -0.1496 ** -0.0447 ** -0.0442 ** -0.0439 ** -0.0438 ** -0.0443 ** -0.2086 *** -0.0425 ** -0.0445 **

(-2.46) (-2.15) (-2.13) (-2.12) (-2.11) (-2.14) (-3.68) (-2.04) (-2.14)

D(more directors) 0.1305 * 0.0165 0.0166 0.0155 0.0167 0.0158 0.0140 0.2035 *** 0.0165

(1.91) (0.66) (0.67) (0.62) (0.67) (0.64) (0.56) (3.26) (0.66)

D(high GIM index) 0.1115 0.0172 0.0174 0.0160 0.0173 0.0168 0.0170 0.0175 0.1572 **

(1.56) (0.68) (0.69) (0.63) (0.68) (0.67) (0.67) (0.69) (2.22)

Economic variables

Market-to-book 0.0033 * 0.0033 * 0.0033 * 0.0033 * 0.0033 * 0.0033 * 0.0033 * 0.0034 * 0.0033 *

(1.74) (1.75) (1.74) (1.72) (1.74) (1.75) (1.75) (1.76) (1.75)

Firm risk (ROA) 0.0077 ** 0.0077 ** 0.0078 ** 0.0078 ** 0.0077 ** 0.0078 ** 0.0078 ** 0.0076 ** 0.0077 **

(2.28) (2.28) (2.27) (2.31) (2.28) (2.30) (2.30) (2.23) (2.25)

Firm risk (stock returns) 0.0185 *** 0.0190 *** 0.0191 *** 0.0190 *** 0.0190 *** 0.0191 *** 0.0188 *** 0.0189 *** 0.0188 ***

(5.02) (5.03) (5.05) (5.06) (5.03) (5.06) (5.02) (5.06) (5.03)

Ln(sales) 0.4217 *** 0.4199 *** 0.4200 *** 0.4209 *** 0.4202 *** 0.4202 0.4204 *** 0.4213 *** 0.4194 ***

(39.62) (39.73) (39.62) (39.7) (39.66) (39.54) *** (39.72) (39.75) (39.77)

ROA 0.0009 0.0009 0.0009 0.0009 0.0009 0.0009 0.0009 0.0008 0.0009

(0.76) (0.77) (0.76) (0.80) (0.75) (0.79) (0.79) (0.73) (0.77)

Prior year ROA 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 **

(2.03) (2.02) (2.02) (2.04) (2.01) (2.04) (2.04) (2.05) (2.02)

Stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(9.10) (9.14) (9.13) (9.15) (9.11) (9.13) (9.13) (9.10) (9.14)

Prior year stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(10.18) (10.28) (10.27) (10.29) (10.30) (10.25) (10.21) (10.20) (10.24)

Local variables

Cost of living index 0.0007 * 0.0007 ** 0.0007 * 0.0007 * 0.0007 * 0.0007 * 0.0007 * 0.0007 ** 0.0007 *

(1.94) (1.99) (1.93) (1.90) (1.91) (1.95) (1.86) (1.99) (1.89)

Local stock return – market return 0.0001 0.0001 0.0002 0.0001 0.0002 0.0002 0.0001 0.0001 0.0001

(0.38) (0.53) (0.55) (0.53) (0.63) (0.56) (0.52) (0.36) (0.42)

Intercept 3.8162 *** 3.8489 *** 3.9195 *** 3.9255 *** 3.9159 *** 3.9162 *** 3.9695 *** 3.7617 *** 3.7999 ***

(20.04) (22.88) (23.36) (23.35) (22.98) (23.31) (23.98) (21.33) (21.53)

Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes

Adjusted R-squared 0.4991 0.4977 0.4977 0.4979 0.4977 0.4977 0.4984 0.4985 0.4981

Observations 14,529 14,529 14,529 14,529 14,529 14,529 14,529 14,529 14,529

45

Table 13 CEO and Director Connections

The sample is comprised of S&P 1500 firms between 1994 and 2005. The dependent variable is Ln(TDC1) (total

annual pay in ExecuComp, expressed in 2005 dollars). The number of CEO and director connections is the number

of prior connections between the CEO and directors via education, work, board, and non-profit organizations,

derived from the BoardEx database. Residual of Ln(number of local CEOs) on Ln(number of CEO and director

connections) is the error term in a regression of Ln(number of local CEOs) on Ln(number of CEO and director

connections). D(more CEO and director connections) is an indicator of 1 if the number of prior connections

between the CEO and directors is greater than or equal to the sample median value; and 0 otherwise. All remaining

variables are defined in the Appendix Table. Standard errors are clustered at the firm level when computing

significance; t-statistics are given in parentheses below each reported coefficient; ***, **, and * denote p-value ≤

0.01, 0.05 and 0.10, respectively.

Dependent variable Ln(TDC1)

Social variables

Ln(number of local CEOs) 0.0799 *** 0.0786 *** 0.0729 ***

(7.39) (7.29) (5.63)

Ln(number CEO and director connections) 0.0798 ** 0.0762 ***

(3.82) (3.67)

Residual of Ln(number of local CEOs) on 0.0780 ***

Ln(number CEO and director connections)

(7.23)

Residual of Ln(number CEO and director

connections) on Ln(number of local CEOs)

0.0731 ***

(3.52)

D(more CEO and director connections) 0.0385

(0.61)

Ln(number of local CEOs) *

D(more CEO and director connections)

0.0143

(0.85)

Economic variables

Market-to-book 0.0033 * 0.0035 * 0.0034 * 0.0034 * 0.0034 *

(1.76) (1.84) (1.79) (1.79) (1.80)

Firm risk (ROA) 0.0077 ** 0.0078 ** 0.0075 ** 0.0075 ** 0.0074 **

(2.32) (2.32) (2.26) (2.26) (2.21)

Firm risk (stock returns) 0.0195 *** 0.0207 *** 0.0198 *** 0.0198 *** 0.0199 ***

(5.44) (5.58) (5.50) (5.50) (5.52)

Ln(sales) 0.4143 *** 0.4176 *** 0.4114 *** 0.4114 *** 0.4114 ***

(38.53) (38.46) (38.12) (38.12) (38.20)

ROA 0.0009 0.0008 0.0009 0.0009 0.0008

(0.76) (0.71) (0.74) (0.74) (0.71)

Prior year ROA 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 ** 0.0024 **

(2.03) (2.05) (2.03) (2.03) (2.05)

Stock return 0.0016 *** 0.0015 *** 0.0016 *** 0.0016 *** 0.0015 ***

(8.95) (8.71) (8.89) (8.89) (8.87)

Prior year stock return 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 *** 0.0016 ***

(10.22) (9.85) (10.13) (10.13) (10.09)

46

Table 13 continued

Governance variables

CEO chairs the board 0.1373 *** 0.1293 *** 0.1295 *** 0.1295 *** 0.1282 ***

(5.75) (5.34) (5.41) (5.41) (5.36)

Tenure as CEO -0.0037 * -0.0040 ** -0.0040 ** -0.0040 ** -0.0039 **

(-1.89) (-2.04) (-2.05) (-2.05) (-1.98)

% of shares held by blockholders -0.0023 *** -0.0022 *** -0.0022 *** -0.0022 *** -0.0022 ***

(-3.73) (-3.62) (-3.71) (-3.71) (-3.69)

% of shares held by institutions 0.0056 *** 0.0058 *** 0.0056 *** 0.0056 *** 0.0056 ***

(8.59) (8.88) (8.64) (8.64) (8.62)

% of shares held by insiders -0.0045 *** -0.0045 *** -0.0045 *** -0.0045 *** -0.0045 ***

(-4.02) (-3.99) (-4.03) (-4.03) (-4.05)

% inside directors 0.0000 -0.0003 -0.0002 -0.0002 -0.0001

(-0.05) (-0.60) (-0.48) (-0.48) (-0.24)

Number of directors 0.0080 ** 0.0057 0.0064 * 0.0064 * 0.0071 *

(2.16) (1.53) (1.75) (1.75) (1.95)

GIM index 0.0085 * 0.0079 * 0.0082 * 0.0082 * 0.0082 *

(1.83) (1.72) (1.78) (1.78) (1.79)

Local variables

Cost of living index 0.0007 ** 0.0023 *** 0.0008 ** 0.0008 *** 0.0008 **

(2.06) (6.89) (2.19) (2.19) (2.17)

Local stock return – market return 0.0002 0.0004 0.0002 0.0002 0.0002

(0.65) (1.51) (0.72) (0.72) (0.79)

Intercept 3.5614 *** 3.6366 *** 3.8823 *** 3.6340 *** 3.6120 ***

(21.13) (20.57) (22.61) (21.29) (21.18)

Year fixed effects Yes Yes Yes Yes Yes

Fama-French 48 industry fixed effects Yes Yes Yes Yes Yes

Adjusted R-squared 0.4983 0.4947 0.4997 0.4997 0.5000

Observations 14,529 14,529 14,529 14,529 14,529

47

Appendix

Variable name Variable definition

Compensation variables

Ex-ante total annual pay

(TDC1)

The sum of salary, bonus, the total value of restricted stock granted, the total value

of stock options granted, long-term incentive payouts, and other compensation

(ExecuComp variable TDC1).

Ex-post total annual pay

(TDC2)

Same as TDC1 except we replace the value of stock options granted by the value of

stock options exercised during the year (ExecuComp variable TDC2).

Salary ExecuComp variable Salary.

Bonuses ExecuComp variable Bonus.

Social variables

Number of local CEOs

The number of S&P 1500 companies headquartered within 60 miles of the

headquarters location of the firm. This count includes the firm itself.

Number of Forbes 400

The number of individuals identified by Forbes Magazine annually as one of the

richest 400 Americans that live within 60 miles of the firm’s headquarters.

Number of prominent

alumni

The number of individuals who went to the same the college with the CEO with

overlapping years and serve(d) as officers or directors at private companies, public

firms, and non-profit organizations covered by the BoardEx database.

Number of non-profit boards

The number of non-profit organizations for which a CEO serves as officer or

director, as defined in the BoardEx database.

Number of nearby social

elites

The number of individuals who are listed in the 2004 Social Register and live within

60 miles of the firm’s headquarters.

Number of IRS top wealth

holders

The number of top wealth holders in the state where the firm’s headquarters is

located, estimated by the US Internal Revenue Service (IRS) from estate tax return

filings in 1998.

Luxury home value

The 99th

percentile of the values for homes sold in the metropolitan statistical area

(MSA).

CEO narcissism score

Defined based on the number of persons in a photo and the size of the photo

included in the annual report (Chatterjee and Hambrick 2007). The narcissism score

is 4 if the CEO is the only person in a photo that covers a whole page in the annual

report; 3 if the CEO has a solo photo that covers less than a page; 2 if other officers

or directors are present in the same photo with the CEO or in other photo(s) on the

same page; and 1 if the CEO does not have a photo in the annual report.

Economic variables

Market-to-book

The ratio of the market value to the book value of equity

(Compustat: data25*data199/data216).

Firm risk (ROA) The standard deviation of ROA in the trailing five years.

Firm risk (stock return) The annualized standard deviation of monthly stock returns in the trailing five years.

Sales Compustat variable data12.

ROA Return on assets (Compustat: data237/data6).

Stock return (TRS1YR) The trailing year stock return (ExecuComp variable TRS1YR).

Governance variables

D(CEO chairs the board) An indicator of 1 if the CEO serves as the chairman of the board; and 0 otherwise.

Tenure as CEO The number of years since the CEO was appointed to the post.

% of shares held by

blockholders

The percentage of shares held by entities who own more than 5% of the outstanding

shares (obtained from Compact Disclosure).

% of shares held by

institutions The percentage of shares held by institutions (obtained from Compact Disclosure).

% of shares held by insiders The percentage of shares held by insiders (obtained from Compact Disclosure).

% of inside directors

The percentage of board members who are the firm’s officers (obtained from

Compact Disclosure).

GIM index

The number of anti-takeover provisions (a lower value indicates better external

corporate governance); defined by Gompers, Ishii, and Metrick (2003).

48

Appendix continued

Governance variables continued

Number of CEO and

director connections

The number of prior connections between the CEO and directors via education,

work, board, and non-profit organizations, derived from the BoardEx database.

Local variables

Cost of living index

The living cost differential across U.S. urban areas for moderately affluent

professionals (published by the Council for Community and Economic Research).

Local stock return less

market return

The value weighted return (TRS1YR) of all firms headquartered within 60 miles of

the firm’s headquarters less the CRSP value weighted market return (VWRETD).

Average lagged pay for local

CEOs

The average ex-ante total pay of CEOs whose headquarters are located within 60

miles of the firm’s headquarters. CEO pay is lagged by one year. In the calculation

of average CEO pay, the CEO of interest is excluded.

49