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

Haidan Li (Department of Accounting, Santa Clara University, Santa Clara, California, USA)
Yiming Qian (Department of Finance, University of Iowa, Iowa City, Iowa, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Publication date: 17 May 2011

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.

Keywords

Citation

Li, H. and Qian, Y. (2011), "Outside CEO directors on compensation committees: whose side are they on?", Review of Accounting and Finance, Vol. 10 No. 2, pp. 110-133. https://doi.org/10.1108/14757701111129607

Download as .RIS

Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

Please note you might not have access to this content

You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account.
If you would like to contact us about accessing this content, click the button and fill out the form.
To rent this content from Deepdyve, please click the button.