This paper aims to examine whether there is an association between the level of performance‐based incentives offered to CEOs and the composition of firms' boards of directors and the compensation committee.
Univariate tests are used to test the relation between the level of performance‐based incentives and corporate governance structures. A logistic regression analysis is used to predict the probability of CEOs receiving low performance‐based incentives when various characteristics of firms' boards of directors and compensation committees exist.
The authors find the presence of CEO duality reduces the likelihood of lower levels of performance‐based incentives offered to CEOs. Additionally, the authors find CEOs are more likely to receive lower levels of performance‐based incentives when the majority of the compensation committee members serve on less than three other boards, and when the size of the board is less than or equal to nine members.
This study is limited by the fact that the sample may not be representative of the general population of companies in the US.
Shareholders who desire to keep CEO compensation levels low may consider supporting the separation of the positions of CEO and Chairperson of the Board, as well as supporting limiting the number of other boards directors may serve, and reducing or keeping the size of the board to a maximum of nine members.
The authors have documented an association between board structure and CEO compensation. It appears that company boards are able to monitor and control the compensation level offered to CEOs.
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