Why Acquisition Experience Matters : Director Pay and Target Selection Expertise

Is director acquisition experience remunerated and how does it benefit the firm? We build on behavioral learning theory and argue that acquisition experience and expertise built up over a director's career are remunerated at the board level. Moreover, we argue that acquisition experience of both executive and non-executive directors will result in better target identification and bidding behavior at the firm level. When analyzing pay practices of the largest UK companies over nearly two decades, our results indicate that a one standard deviation increase in executive and non-executive directors' acquisition experience is associated with an increase in total compensation of roughly 6% and 9%, respectively. Acquisition experience is presumably better remunerated for non-executives as they have incentives to hinder the executive directors from engaging in wealth-reducing acquisitions. Moreover, our results suggest that experienced directors are more likely to choose generally more profitable targets that are less of a surprise to the market.