CEO Compensation and Concurrent Executive Employment of Outside Directors: A Panel Data Analysis of S&P 1500 firms
In many advanced countries, most outside directors are executives, active or retired, at other firms; in other words, executives from other companies make executive compensation decisions. This situation may hinder the board of directors (BOD) in their efforts to optimize executive compensation leve...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Korea Development Institute
2016-08-01
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| Series: | KDI Journal of Economic Policy |
| Subjects: | |
| Online Access: | https://doi.org/10.23895/kdijep.2016.38.3.17 |
| Summary: | In many advanced countries, most outside directors are executives, active or retired, at other firms; in other words, executives from other companies make executive compensation decisions. This situation may hinder the board of directors (BOD) in their efforts to optimize executive compensation levels objectively. Using a panel data analysis of the S&P 1500 companies, we provide supplemental evidence of whether, and to what extent, the concurrent executive employment of outside directors distorts the executive pay decisions at a given company. An unbiased fixed-effect estimation confirms that a $1.00 increase in CEO pay at outside directors’ primary companies results in an approximate increase of $0.22 in CEO pay at the given company. From a policy perspective, this added agency problem — caused by the BOD and not by management— is noted as difficult to control; although a firm may establish board independence, the inherent concurrent employment of directors on a board continues to exist. |
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| ISSN: | 2586-2995 2586-4130 |