Does the Age of Compensation Committee Members Matter for CEO Compensation?

Abstract

We examine the impact of compensation committee members’ (CC members’) age on CEO compensation using FTSE 350 firms for the period 2002 to 2017. Sociological theory suggests that age is a significant demographic factor influencing individuals’ behaviour. We argue that monitoring intensity increases with age because older directors are more likely to commit to their fiduciary duties. We find that CC members’ age is negatively associated with the level of CEO pay but positively associated with pay–performance sensitivity after controlling for risk aversion attitude, experience in board monitoring, knowledge of the firm and other firm and CEO characteristics. The relationships remain robust for employing alternative measures for age and compensation and using two-stage least squares and high-dimensional fixed effects models. Further analysis demonstrates that the age effects are sensitive to the influence of alternative ethical factors and are strongest for those firms in which intense monitoring is most needed. The relationship between CC members’ age and CEO compensation persists over the additional controls for multiple dimensions of culturally inherited attributes of the CC members. Our study highlights the value of demographic factors in ensuring greater monitoring of the CEO compensation contracting process and provides pertinent evidence on the recent regulatory changes.

Keywords: Age; Compensation committee; CEO compensation; Monitoring intensity; Fiduciary duty