How Firms Use Director Networks in Setting CEO Pay

40 Pages Posted: 20 May 2020

See all articles by Ian Cherry

Ian Cherry

University of South Florida - Department of Finance

Vladimir A. Gatchev

University of Central Florida - Department of Finance

Date Written: August 2019

Abstract

We examine how firms use the network of overlapping directorships to determine chief executive officer (CEO) compensation. We contribute to related work by empirically exploring two competing hypotheses. In the first hypothesis, networks propagate relevant information used to establish good pay practices. In the second hypothesis, director networks are used opportunistically to benefit the CEO. The empirical findings are generally consistent with the first hypothesis. Yet, the importance of director networks is reduced when the CEO is entrenched and when management hires a compensation consultant. The latter finding is especially pronounced when director networks predict a reduction in CEO pay.

Keywords: executive compensation, director networks, corporate governance

JEL Classification: G34, G38, J33, M12

Suggested Citation

Cherry, Ian and Gatchev, Vladimir A., How Firms Use Director Networks in Setting CEO Pay (August 2019). Financial Review, Vol. 54, Issue 3, pp. 501-540, 2019, Available at SSRN: https://ssrn.com/abstract=3601142 or http://dx.doi.org/10.1111/fire.12190

Ian Cherry (Contact Author)

University of South Florida - Department of Finance ( email )

Tampa, FL 33620-5500
United States

Vladimir A. Gatchev

University of Central Florida - Department of Finance ( email )

Orlando, FL 32816-1400
United States
(407) 823-3694 (Phone)
(407) 823-6676 (Fax)

HOME PAGE: http://www.bus.ucf.edu/vgatchev/

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