Does Independent Advice to The Board Affect CEO Compensation?

Journal of Financial and Quantitative Analysis, Forthcoming

59 Pages Posted: 24 Oct 2019

See all articles by Tor-Erik Bakke

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance

Hamed Mahmudi

University of Delaware - Department of Finance

Date Written: October 15, 2019

Abstract

This paper investigates the role external advice plays in the board’s determination of CEO compensation. We show that CEO incentive pay increases with the degree of compensation consultant independence using a quasi-natural experiment provided by the creation of an independent consultant after separation from an affiliated consultant. Specifically, switching to an independent consultant significantly increases Pay-Performance Sensitivity and Relative Performance Evaluation of CEO contracts. Despite the benefits of independent advice, independent consultants may not be hired due to the influence of powerful CEOs or because boards already possess adequate expertise.

Keywords: Compensation Consultants, Independent Advice, Pay-Performance Sensitivity

JEL Classification: G30, G34, J33, J41

Suggested Citation

Bakke, Tor-Erik and Mahmudi, Hamed, Does Independent Advice to The Board Affect CEO Compensation? (October 15, 2019). Journal of Financial and Quantitative Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3470440

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
6087707753 (Phone)

HOME PAGE: http://https://sites.google.com/site/tebakke/

Hamed Mahmudi (Contact Author)

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

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