Us knows us in the UK: On director networks and CEO compensation

Abstract

We analyze the relation between CEO compensation and networks of executive and nonexecutive directors for all listed UK companies over the period 1996-2007. We examine whether networks are built for reasons of information gathering or for the accumulation of managerial influence. Both indirect networks (enabling directors to collect information) and direct networks (leading to more managerial influence) enable the CEO to obtain higher compensation. Direct networks can harm the efficiency of the remuneration contracting in the sense that the performance sensitivity of compensation is then lower. We find that in companies with strong networks and hence busy boards the directors' monitoring effectiveness is reduced which leads to higher and less performance-sensitive CEO compensation. Our results suggest that it is important to have the 'right' type of network: some networks enable a firm to access valuable information whereas others can lead to strong managerial influence that may come at the detriment of the firm and its shareholders. We confirm that there are marked conflicts of interest when a CEO increases his influence by being a member of board committees (such as the remuneration committee) as we observe that his or her compensation is then significantly higher. We also find that hiring remuneration consultants with sizeable client networks also leads to higher CEO compensation especially for larger firms.

Corporate Governance, Institutional Characteristics, and Director Networks in Malaysia

“…The multiple directorships appointment could be seen as a proxy for director's reputation. Director with multiple directorships can be seen to have certain advantages over other such as resource exchange, control and influence over company's management (Renneboog & Zhao, 2011). Therefore, companies tend to appoint directors who are well-connected to other boardrooms (Barnea & Guedj, 2007).…”

Shifting the Goalposts? Analysing Changes to Performance Peer Groups Used to Determine the Remuneration of FTSE 100 CEOs

“…Accordingly, we use the log of total assets to control for firm size. Furthermore, we use the average number of corporate affiliations of board members (Director Affiliations) as a proxy for board networks (Fich and Shivdasani, 2006;Larcker, So and Wang, 2013;Renneboog and Zhao, 2011). Finally, we control for average portfolio turnover of the top-five institutional investors (Institutional Investor Ownership Turnover), weighted by their percentage ownership, as a proxy for investor heterogeneity and heterogeneous investment horizons (Gaspar, Massa and Matos 2005).…”

“…Stock-based compensation (SBC) has become an increasingly significant component of executive reward for UK CEOs, while the level of detail and complexity in the design of the stock-based element of pay has increased considerably since the mid-1980s (e.g. Buck et al, 2003;Conyon and Schwalbach, 2000;Goergen and Renneboog, 2011;Main, Bruce and Buck, 1996;Ozkan, 2011;Renneboog and Zhao, 2011). Recent empirical research documents the widespread use of relative performance evaluation (RPE) in stock-based incentive contracts where CEOs and managers are evaluated on the basis of peer performance and, in particular, the use of performance peer groups in restricted share schemes, performance share plans or long-term incentive plans (LTIPs) (Carter, Ittner and Zechman, 2009;Gong, Li and Shin, 2011).…”

No Place Like the Frontline: A Qualitative Study on What Participant CEOs Learned From Undercover Boss

“…The conception of CEOs in the literature traditionally has been dominated by the importance of developing and sustaining networks for improving organizational effectiveness (Lakshman, 2007 ). For instance, CEO networks were explored to determine compensation arrangements (Brown, Gao, Lee, & Stathopolous, 2012 ;Horton, Millo, & Serafeim, 2012 ;Renneboog & Zhao, 2011 ) and the propensity for mergers and acquisitions (e.g., Chikh & Filbien, 2011 ). With respect to CEOs' external networks, studies have found that peer-to-peer networking within a similar industry increased the economic value of the organizations (Chen et al, 2009 ;McDonald & Westphal, 2003 ).…”