Economic Characteristics, Corporate Governance, and the Influence of Compensation Consultants on Executive Pay Levels

62 Pages Posted: 15 Jun 2008 Last revised: 12 Sep 2013

Chris Armstrong

University of Pennsylvania - Accounting Department

Christopher D. Ittner

University of Pennsylvania - Accounting Department

David F. Larcker

Stanford University - Graduate School of Business

Date Written: June 12, 2008

Abstract

This study investigates the relation between the use of compensation consultants and CEO pay levels. Using new proxy statement disclosures from 2,116 companies, we examine claims that pay is higher in clients of compensation consultants, and test whether any pay differences in users and non-users of consultants are due to differences in economic or corporate governance characteristics. We find that CEO pay is generally higher in clients of most consulting firms, even after controlling for economic determinants of compensation. However, when users and non-users are matched on both economic and governance characteristics, differences in pay levels are not statistically significant. These results are consistent with claims that compensation consultants provide a mechanism for CEOs of companies with weak governance to extract and justify excess pay. Finally, we find no support for claims that CEO pay is higher in conflicted consultants that also offer additional non-compensation related services.

Keywords: corporate governance, executive compensation, compensation consultants

JEL Classification: G30, M52, J33, J38, J41, C14

Suggested Citation

Armstrong, Chris and Ittner, Christopher D. and Larcker, David F., Economic Characteristics, Corporate Governance, and the Influence of Compensation Consultants on Executive Pay Levels (June 12, 2008). Rock Center for Corporate Governance Working Paper No. 15; Review of Accounting Studies, Vol. 17, No. 2, June 2012. Available at SSRN: https://ssrn.com/abstract=1145548 or http://dx.doi.org/10.2139/ssrn.1145548

Chris S. Armstrong (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

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