Us Knows Us in the UK: On Director Networks and CEO Compensation
AbstractWe analyze the relation between CEO compensation and networks of executive and non-executive directors for all listed UK companies over the period 1996-2007. We examine whether networks are built for reasons of information gathering or for the accumulation of managerial influence. Both indirect networks (enabling directors to collect information) and direct networks (leading to more managerial influence) enable the CEO to obtain higher compensation. Direct networks can harm the efficiency of the remuneration contracting in the sense that the performance sensitivity of compensation is then lower. We find that in companies with strong networks and hence busy boards the directors’ monitoring effectiveness is reduced which leads to higher and less performance-sensitive CEO compensation. Our results suggest that it is important to have the ‘right’ type of network: some networks enable a firm to access valuable information whereas others can lead to strong managerial influence that may come at the detriment of the firm and its shareholders. We confirm that there are marked conflicts of interest when a CEO increases his influence by being a member of board committees (such as the remuneration committee) as we observe that his or her compensation is then significantly higher. We also find that hiring remuneration consultants with sizeable client networks also leads to higher CEO compensation especially for larger firms.
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Bibliographic InfoPaper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2011-014.
Date of creation: 2011
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Web page: https://www.tilburguniversity.edu/research/institutes-and-research-groups/center-ar/
Executive remuneration; Professional and social networks; Corporate governance; Managerial Power; Remuneration consultants;
Find related papers by JEL classification:
- G3 - Financial Economics - - Corporate Finance and Governance
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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- Allgood, Sam & Farrell, Kathleen A. & Kamal, Rashiqa, 2012. "Do boards know when they hire a CEO that is a good match? Evidence from initial compensation," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1051-1064.
- R. Andergassen, 2011. "Board of director collusion, managerial incentives and firm values," Working Papers wp795, Dipartimento Scienze Economiche, Universita' di Bologna.
- Lalanne, Marie & Seabright, Paul, 2011.
"The Old Boy Network: Gender Differences in the Impact of Social Networks on Remuneration in Top Executive Jobs,"
IDEI Working Papers
689, Institut d'Économie Industrielle (IDEI), Toulouse.
- Lalanne, Marie & Seabright, Paul, 2011. "The Old Boy Network: Gender Differences in the Impact of Social Networks on Remuneration in Top Executive Jobs," CEPR Discussion Papers 8623, C.E.P.R. Discussion Papers.
- Lalanne, Marie & Seabright, Paul, 2011. "The Old Boy Network: Gender Differences in the Impact of Social Networks on Remuneration in Top Executive Jobs," TSE Working Papers 11-259, Toulouse School of Economics (TSE).
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