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Does Independent Advice to the Board Affect CEO Compensation?

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  • Bakke, Tor-Erik
  • Mahmudi, Hamed

Abstract

This article investigates the role external advice plays in the board’s determination of chief executive officer (CEO) compensation. We show that CEO incentive pay increases with the degree of compensation consultant independence using a quasi-natural experiment provided by the creation of an independent consultant after separation from an affiliated consultant. Specifically, switching to an independent consultant significantly increases the pay–performance sensitivity and relative performance evaluation of CEO contracts. Despite the benefits of independent advice, independent consultants may not be hired due to the influence of powerful CEOs or because boards already possess adequate expertise.

Suggested Citation

  • Bakke, Tor-Erik & Mahmudi, Hamed, 2021. "Does Independent Advice to the Board Affect CEO Compensation?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(2), pages 693-744, March.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:2:p:693-744_10
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    Cited by:

    1. Frye, Melissa B. & Gatchev, Vladimir A. & Pham, Duong T., 2024. "Director self-dealing: Evidence from compensation peer groups," Journal of Corporate Finance, Elsevier, vol. 85(C).
    2. Wang, Qiong & Qiu, Muqing, 2023. "Strength in numbers: Minority shareholders' participation and executives' pay-performance sensitivity," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    3. Cheng, Xu & Kong, Dongmin & Kong, Gaowen, 2022. "Foreign institutional investors and executive compensation incentives: Evidence from China," Journal of Multinational Financial Management, Elsevier, vol. 66(C).
    4. Zhao, Qicheng & Hu, Changyu & Ma, Ruiyun & Yin, Yugang & Liu, Yahui, 2024. "Foreign shareholders and executive compensation stickiness: Evidence from China," Finance Research Letters, Elsevier, vol. 59(C).

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