Executive pay is starting to look the same everywhere. That could hurt performance, study suggests

Corporate boards are increasingly paying their chief executives similarly — a shift that could weaken company performance.

A new study from Virginia Tech finds that CEO compensation has become 24 percent more similar across public firms since 2006. Researchers measured the change using a composite index that tracks how companies structure pay — including salary, bonuses, stock awards, and other incentives.

Companies now follow strikingly similar models regardless of size, strategy, or sector. The study, published in the Journal of Accounting and Economics, suggests that this trend—driven largely by investor demands and disclosure rules—is diluting the connection between pay and performance.

“Boards face pressure to conform,” said Felipe Cabezón, assistant professor at Virginia Tech’s Pamplin College of Business and the study’s author. “But in doing so, they risk sacrificing flexibility and lowering shareholder value.”

Cabezón analyzed data from more than 2,700 public companies between 2006 and 2019 to address an important question: Are boards designing compensation packages to drive performance or avoid criticism?

Boards copy each other, and investors reward it

Firms once tailored executive pay to match business goals. Growth-oriented companies leaned on performance-based bonuses, while others prioritized retention packages or long-term equity grants. However, that tailored approach is fading.

Instead, institutional investors and proxy advisors now push companies toward standardized plans.

“Large shareholders vote on compensation but often rely on proxy advisors who favor one-size-fits-all templates,” Cabezón said. “That creates powerful incentives to fall in line.”

Disclosure rules have accelerated the trend. As companies release more detailed pay data, boards increasingly benchmark against peers — not necessarily because it fits their strategy but because it’s safer.

“Transparency promotes accountability,” Cabezón said. “But it can also encourage mimicry.”

Uniformity has a price

The study links standardization to lower firm performance. Companies that adopted more conventional pay structures showed weaker alignment between executive incentives and business outcomes — including lower pay-performance sensitivity and declines in Tobin’s Q, a key indicator of shareholder value.

“Boards feel pressure to conform to best practices, even against their own preferred compensation plans,” Cabezón said. “That misalignment shows up in performance metrics.”

Even modest deviations from industry norms can attract scrutiny. Companies that stray from standard models are more likely to receive negative recommendations from proxy advisors — signals that can sway shareholder votes.

After such warnings, many boards revert to the median, flattening nuance in compensation design.

Why investors should care

The findings carry implications for corporate directors, investors, and regulators.

The study suggests that boards should rethink their reliance on cookie-cutter pay plans. Investors should look beyond optics and consider whether compensation supports a company’s strategic goals.

Notably, the study found that companies required to hold annual Say-on-Pay votes — a result of tighter investor oversight — saw a 10 percent increase in compensation similarity compared to firms that voted every three years.

“Companies need room to tailor incentives,” Cabezón said. “Standardization may look efficient, but it can flatten the differences that matter.”

Cabezón recently joined a panel hosted by the Center On Executive Compensation, where he discussed the findings of his study alongside senior compensation leaders from Exxon, Johnson & Johnson, Kroger, and Norges Bank Investment Management. The webinar, focused on resisting the homogenization of executive pay, brought together CHROs and heads of total rewards from some of the country’s largest public companies.

The findings also raise broader policy questions. While Say-on-Pay and other transparency rules aim to improve governance, they may nudge companies toward conformity instead.

“It’s an unintended consequence of policies meant to increase oversight,” Cabezón said.

Standardization may undercut strategy

The study adds to a growing body of evidence that institutional influence, proxy advisor pressure, and regulatory disclosure have reshaped how companies pay their executives — and not always for the better.

“Not every company needs the same compensation plan,” Cabezon said. “But when everyone copies the same model, we lose the ability to reward performance in ways that drive results.”