Executive Directors' Pay, Networks and Operating Performance: The Influence of Ownership Structure

Abstract

This paper examines how ownership structure affects the director networking-compensation relationship. Furthermore, we measure the subsequent impact of this relationship on future operating performance of firms. As in previous research, our study also finds empirical evidence suggesting that higher network activity of executive directors conveys to larger compensation figures. Our data set of Spanish listed companies, with high average ownership concentration, show that this compensation is higher for firms with dispersed ownership than for firms with concentrated ownership. Also, the relationship of overcompensation with future operating performance is contingent on the ownership structure.

The implications for executive directors are that networking leads to higher compensation. For dispersed ownership firms, the consequence is that promoting executive networking could be harmful unless other corporate governance mechanisms prevent this outcome. For concentrated ownership firms, this structure allows to capture increases in operating performance. Finally, policy recommendations on corporate governance regulation are that self-regulation is better than imposing the same limit on the number of directorships to all firms if an effective control mechanism operates. Our results suggest that the presence of controlling owners is a strong corporate governance mechanism.

Keywords: Corporate Governance, Executive Compensation, Social Networks, Ownership Structure

JEL Classification: G30, G34