KDI Journal of Economic Policy

Korea Development Institute (한국개발연구원)
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CEO Compensation and Concurrent Executive Employment of Outside Directors: A Panel Data Analysis of S&P 1500 firms

  • KIM, YOUNG-CHUL (Department of Economics and Finance, Sangmyung University) ;
  • SONG, SUJIN (School of Business Administration, Korea University)
  • Received : 2016.01.19
  • Published : 2016.08.31
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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

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