Compensation Consultants and the Level, Composition and Complexity of CEO Pay

58 Pages Posted: 25 Sep 2017 Last revised: 8 Mar 2019

See all articles by Kevin J. Murphy

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Tatiana Sandino

Harvard Business School - Accounting and Control

Date Written: August 28, 2017

Abstract

We provide fresh evidence regarding the relation between compensation consultants and CEO pay. First, firms that employ consultants have higher-paid CEOs—this result is robust to firm fixed-effects and matching on economic and governance variables. Second, while this relation is partly due to consultant conflicts of interest, it is largely explained by the impact consultants have on the composition and complexity of CEO pay plans; notably, this impact fully mediates the consultant-CEO pay relation. Third, firms with higher-paid CEOs and more complex pay plans are more likely to hire a consultant. Lastly, say-on-pay voting patterns suggest shareholders view positively the advice consultants provide but only when consultants do not provide other services. We also find suggestive evidence of boards “layering” new equity incentive plans over existing ones, thereby increasing the impact of composition and complexity on CEO pay beyond the premium the CEO would demand for bearing additional compensation risk.

Keywords: Consultants, Benchmarking, Incentive Pay, Governance, Executive Compensation

JEL Classification: J33, M12, M52, M48

Suggested Citation

Murphy, Kevin J. and Sandino, Tatiana, Compensation Consultants and the Level, Composition and Complexity of CEO Pay (August 28, 2017). Accepted and forthcoming at The Accounting Review. Available at SSRN: https://ssrn.com/abstract=3041427 or http://dx.doi.org/10.2139/ssrn.3041427

Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

Tatiana Sandino (Contact Author)

Harvard Business School - Accounting and Control ( email )

367 Morgan Hall
Soldiers Field
Boston, MA 02163
United States
617-495-0625 (Phone)

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