Why Have CEO Pay Levels Become Less Diverse?

We document that the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within industry and size groups. We find evidence consistent with one explanation; reciprocal benchmarking (i.e., firms including each other in the set of peers used to benchmark pay). We find support for three factors contributing to the rise in reciprocal benchmarking; the mandatory disclosure of compensation peer groups, say on pay, and proxy advisory influence. Finally, we find that reciprocal benchmarking has meaningful economic consequences; lower external tournament incentives, lower risk-taking, lower stock performance, and higher stock return synchronicity within industries.