CEO Compensation and Concurrent Executive Employment of Outside Directors: A Panel Data Analysis of S&P 1500 firms

KIM, Young-Chul / Song, SuJin

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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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