Corporate Governance and the Level of CEO Compensation

Posted: 22 Sep 1997

See all articles by Richard Cyert

Richard Cyert

Formerly affiliated with Carnegie Mellon University - Graduate School of Industrial Administration (GSIA)

Sok-Hyon Kang

George Washington University - School of Business

Praveen Kumar

University of Houston - Department of Finance

Anish Shah

Bain & Company

Date Written: January 1997

Abstract

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

Cyert (deceased), Richard and Kang, Sok-Hyon and Kumar, Praveen and Shah, Anish, Corporate Governance and the Level of CEO Compensation (January 1997). Available at SSRN: https://ssrn.com/abstract=28734

Richard Cyert (deceased)

Formerly affiliated with Carnegie Mellon University - Graduate School of Industrial Administration (GSIA)

N/A

Sok-Hyon Kang (Contact Author)

George Washington University - School of Business ( email )

405 Government Hall
GWU
Washington, DC 20052
United States
(202) 994-6058 (Phone)
(202) 994-5164 (Fax)

Praveen Kumar

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Anish Shah

Bain & Company

Two Copley Place
Boston, MA 02118
617-572-2000 (Phone)
617-572-2427 (Fax)

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