US Knows Us in the UK: On Director Networks and CEO Compensation

55 Pages Posted: 20 Feb 2011 Last revised: 18 Mar 2011

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Yang Zhao

Newcastle University

Date Written: February 16, 2011

Abstract

We 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.

Keywords: Executive remuneration, Professional and social networks, Corporate governance, Managerial Power, Remuneration consultants

JEL Classification: G3, J3, L14

Suggested Citation

Renneboog, Luc and Zhao, Yang, US Knows Us in the UK: On Director Networks and CEO Compensation (February 16, 2011). CentER Discussion Paper Series No. 2011-014; TILEC Discussion Paper No. 2011-014; ECGI - Finance Working Paper No. 302/2011. Available at SSRN: https://ssrn.com/abstract=1763167 or http://dx.doi.org/10.2139/ssrn.1763167

Luc Renneboog (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Yang Zhao

Newcastle University ( email )

5 Barrack Road
NEWCASTLE UPON TYNE, NE1 7RU
United Kingdom

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