Keeping Up With the Joneses: Spillover Effect of M&A Activity to Compensation

ABSTRACT We identify a spillover effect from Mergers and Acquisitions (M&A) activity to CEO compensation. Previous research shows that post‐merger, acquiring CEOs receive higher pay with reduced sensitivity to negative performance. We demonstrate that CEOs who don't engage in M&A, but have compensation peers who do, also experience increased pay and decreased pay‐performance sensitivity for negative returns. Additionally, M&A activity significantly influences compensation peer group composition. Our results reveal the effect of peer M&A on compensation results from both labour market pressures and self‐dealing, contributing to explanations for the substantial rise in CEO compensation in recent decades.