Compensation Consultants and CEO Pay: UK Evidence

16 Pages Posted: 1 Nov 2010

See all articles by Georgios Voulgaris

Georgios Voulgaris

University of Manchester - Alliance Manchester Business School; Alliance Manchester Business School

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

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Abstract

This paper provides new evidence on the effect of compensation consultants on CEO pay.

We produce new evidence on the managerial power approach (MPA) to corporate governance by examining the influence of compensation consultants on CEO pay structures and the decision to hire a compensation consultant in the UK. We find evidence that is not consistent with the MPA. Contrary to the MPA predictions, we find that the positive effect of consultants on CEO pay levels mainly stems from an increase in equity-based compensation. We show that consultants exert a negative influence on basic (cash) pay. In addition, we illustrate that the choice of hiring a consultant can be explained by economic determinants, e.g., firm governance characteristics. The existence of a powerful CEO does not increase the likelihood of hiring a pay consultant. The results are robust to several model specifications and tests for selection bias.

The results indicate that compensation consultants may have a positive effect on the structure of CEO pay since they encourage incentive-based compensation. We also show that economic determinants, rather than CEO power, explain the decision to hire compensation consultants. Overall, our results cast doubts on the conclusions of the MPA regarding the role of compensation consultants. Their role can be better explained within the optimal contracting framework.

This study offers insights to the positive effect the hiring of a pay consultant could have towards the design of a CEO pay contract.

Suggested Citation

Voulgaris, Georgios and Stathopoulos, Konstantinos and Walker, Martin, Compensation Consultants and CEO Pay: UK Evidence. Corporate Governance: An International Review, Vol. 18, Issue 6, pp. 511-526, November 2010, Available at SSRN: https://ssrn.com/abstract=1699930 or http://dx.doi.org/10.1111/j.1467-8683.2010.00822.x

Georgios Voulgaris (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Alliance Manchester Business School ( email )

Booth street west
Manchester, Greater manchester M15 6PB
United Kingdom

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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