Back Door Links between Directors and Executive Compensation

53 Pages Posted: 26 Feb 2005

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Andrew Seary

Simon Fraser University (SFU) - School of Communication

A. Irem Tuna

London Business School

Date Written: February 2005

Abstract

This paper examines whether links between inside and outside directors have an impact on CEO compensation. Using a comprehensive sample of 22,074 directors for 3,114 firms, we develop a measure of the "back door" distance between each pair of directors on a company's board. Specifically, using the entire network of directors and firms, we compute the minimum number of other company boards that are required to establish a connection between each pair of directors (ignoring the obvious link that occurs when directors are on the same board). The back door distance provides a measure for the existence and strength of a communication channel between board members that can be used to influence decisions by the board of directors. We document that CEOs at firms where there is a relatively short back door distance between inside and outside directors or between the CEO and the members of the compensation committee earn substantially higher levels of total compensation (after controlling for standard economic determinants and other personal characteristics of the CEO and the structure for board of directors). This statistical association is consistent with recent claims that the monitoring ability of the board is hampered by "cozy" and possibly difficult to observe relationships between directors.

Keywords: Interlocks, executive compensation, network analysis

JEL Classification: C40, M41, G34, J33

Suggested Citation

Larcker, David F. and Richardson, Scott Anthony and Seary, Andrew and Tuna, Ayse Irem, Back Door Links between Directors and Executive Compensation (February 2005). Available at SSRN: https://ssrn.com/abstract=671063 or http://dx.doi.org/10.2139/ssrn.671063

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Andrew Seary

Simon Fraser University (SFU) - School of Communication ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Ayse Irem Tuna (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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