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Outside CEO directors on compensation committees: whose side are they on?

Author

Listed:
  • Haidan Li
  • Yiming Qian

Abstract

Purpose - The purpose of this paper is to examine whether outside CEO directors sympathize with the company CEO due to their similar positions and prestige, and make decisions in favor of the company CEO. Specifically, the authors investigate how outside CEO directors serving on the compensation committee influence CEO compensation. Design/methodology/approach - The authors investigate how outside CEO directors on the compensation committee impact the level and pay‐for‐performance sensitivity of CEO compensation. In addition, the relation between excess CEO compensation (attributable to outside CEO directors) and future firm‐operating performance is examined. Findings - It is found that outside CEO directors on the compensation committee are associated with higher CEO compensation. However, excess CEO compensation attributable to outside CEO directors leads to poor future firm‐operating performance. Outside CEO directors are associated with higher CEO pay‐for‐performance sensitivity when the company experiences positive stock returns, but do not impact pay‐for‐performance sensitivity when firm performance is poor. Finally, when the company CEO has more influence on the board, outside CEO directors are more likely to serve on the compensation committee. Originality/value - The paper is among the first to show that having outside CEO directors on the compensation committee might create agency problems and is costly to shareholders. The findings of the authors' study are relevant to current efforts of regulators and private sectors to enhance oversight of executive compensation.

Suggested Citation

  • Haidan Li & Yiming Qian, 2011. "Outside CEO directors on compensation committees: whose side are they on?," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(2), pages 110-133, May.
    • Handle: RePEc:eme:rafpps:v:10:y:2011:i:2:p:110-133
    DOI: 10.1108/14757701111129607
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    References listed on IDEAS

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    1. Vidhi Chhaochharia & Yaniv Grinstein, 2009. "CEO Compensation and Board Structure," Journal of Finance, American Finance Association, vol. 64(1), pages 231-261, February.
    2. Fahlenbrach, Rüdiger & Low, Angie & Stulz, René M., 2010. "Why do firms appoint CEOs as outside directors?," Journal of Financial Economics, Elsevier, vol. 97(1), pages 12-32, July.
    3. Brickley, James A. & Coles, Jeffrey L. & Terry, Rory L., 1994. "Outside directors and the adoption of poison pills," Journal of Financial Economics, Elsevier, vol. 35(3), pages 371-390, June.
    4. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    5. Cotter, James F. & Shivdasani, Anil & Zenner, Marc, 1997. "Do independent directors enhance target shareholder wealth during tender offers?," Journal of Financial Economics, Elsevier, vol. 43(2), pages 195-218, February.
    6. Fich, Eliezer M. & White, Lawrence J., 2005. "Why do CEOs reciprocally sit on each other's boards?," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 175-195, March.
    7. Borokhovich, Kenneth A. & Parrino, Robert & Trapani, Teresa, 1996. "Outside Directors and CEO Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 337-355, September.
    8. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563, Elsevier.
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    Cited by:

    1. Alexander Muravyev & Oleksandr Talavera & Charlie Weir, 2016. "Performance effects of appointing other firms’ executive directors to corporate boards: an analysis of UK firms," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 25-45, January.
    2. Alexander Muravyev & Oleksandr Talavera & Charlie Weir, 2016. "Performance effects of appointing other firms’ executive directors to corporate boards: an analysis of UK firms," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 25-45, January.

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