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

Young-Chul Kim and Su Jin Song

KDI Journal of Economic Policy, 2016, vol. 38, issue 3, 17-35

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; DirectorAgency Problem; H825Outside Directors; Board of Directors; Corporate Governance (search for similar items in EconPapers)
JEL-codes: M12 G34 G38 (search for similar items in EconPapers)
Date: 2016
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