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How Firms Use Director Networks in Setting CEO Pay

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  • Ian Cherry
  • Vladimir A. Gatchev

Abstract

We examine how firms use the network of overlapping directorships to determine chief executive officer (CEO) compensation. We contribute to related work by empirically exploring two competing hypotheses. In the first hypothesis, networks propagate relevant information used to establish good pay practices. In the second hypothesis, director networks are used opportunistically to benefit the CEO. The empirical findings are generally consistent with the first hypothesis. Yet, the importance of director networks is reduced when the CEO is entrenched and when management hires a compensation consultant. The latter finding is especially pronounced when director networks predict a reduction in CEO pay.

Suggested Citation

  • Ian Cherry & Vladimir A. Gatchev, 2019. "How Firms Use Director Networks in Setting CEO Pay," The Financial Review, Eastern Finance Association, vol. 54(3), pages 501-540, August.
    • Handle: RePEc:bla:finrev:v:54:y:2019:i:3:p:501-540
    DOI: 10.1111/fire.12190
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    Cited by:

    1. Clement Olalekan Olaniyi & Olaolu Richard Olayeni, 2020. "A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 250-277, December.

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