Corporate Governance and the Level of CEO Compensation
Posted: 22 Sep 1997
Date Written: January 1997
We explore the determinants of the level of CEO compensation, focusing on the governance function of the board of directors (BOD). We argue that there exists a bargaining relationship between the CEO and the BOD with respect to CEO compensation, and that this relationship produces an inverse relation between the level of CEO compensation and the fraction of equity held by the BOD, in particular, the compensation committee. Investigations using a cross-section of compensation data for 1,743 large and small firms provide a strong support for the CEO-BOD bargaining hypothesis. We also document strong positive associations between CEO compensation and firm risk, consistent with standard agency theory. Other factors such as firm size, market and accounting measures of firm performance, and growth opportunities (Smith and Watts 1992) are also important determinants of the level of CEO compensation.
JEL Classification: J33, G32
Suggested Citation: Suggested Citation