How Firms Use Director Networks in Setting CEO Pay
40 Pages Posted: 20 May 2020
Date Written: August 2019
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: Suggested Citation