CEO Compensation and Concurrent Executive Employment of outside Directors: A Panel Data Analysis of S&P 1500 Firms

21 Pages Posted: 13 Oct 2016

Date Written: August 31, 2016

Abstract

In many advanced countries, most outside directors are executives, active or retired, at other firms; in other words, executives from other companies make executive compensation decisions. This situation may hinder the board of directors (BOD) in their efforts to optimize executive compensation levels objectively. Using a panel data analysis of the S&P 1500 companies, we provide supplemental evidence of whether, and to what extent, the concurrent executive employment of outside directors distorts the executive pay decisions at a given company. An unbiased fixed-effect estimation confirms that a $1.00 increase in CEO pay at outside directors’ primary companies results in an approximate increase of $0.22 in CEO pay at the given company. From a policy perspective, this added agency problem — caused by the BOD and not by management — is noted as difficult to control; although a firm may establish board independence, the inherent concurrent employment of directors on a board continues to exist.

Keywords: CEO Compensation, Director-Agency Problem, Outside Directors, Board of Directors, Corporate Governance

JEL Classification: M12, G34, G38

Suggested Citation

Kim, Young-Chul and Song, Sujin, CEO Compensation and Concurrent Executive Employment of outside Directors: A Panel Data Analysis of S&P 1500 Firms (August 31, 2016). KDI Journal of Economic Policy, Vol. 38(3), p. 17-35, 2016, Available at SSRN: https://ssrn.com/abstract=2851621

Young-Chul Kim (Contact Author)

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

Sujin Song

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
144
Abstract Views
852
Rank
363,129
PlumX Metrics