CEO Compensation and Concurrent Executive Employment of Outside Directors: A Panel Data Analysis of S&P 1500 firms
- CEO Compensation and Concurrent Executive Employment of Outside Directors: A Panel Data Analysis of S&P 1500 firms
- KIM, Young-Chul; Song, SuJin
- Issue Date
- 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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