Why Have CEO Pay Levels Become Less Diverse?

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