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

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  • Kim, Young-Chul
  • Song, Su Jin

Abstract

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.

Suggested Citation

  • Kim, Young-Chul & Song, Su Jin, 2016. "CEO Compensation and Concurrent Executive Employment of Outside Directors: A Panel Data Analysis of S&P 1500 firms," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 38(3), pages 17-35.
    • Handle: RePEc:zbw:kdijep:v:38:y:2016:i:3:p:17-35
    DOI: 10.23895/kdijep.2016.38.3.17
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    References listed on IDEAS

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    More about this item

    Keywords

    CEO Compensation; DirectorAgency Problem; H825Outside Directors; Board of Directors; Corporate Governance;
    All these keywords.

    JEL classification:

    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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