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Compensation consultants and CEO pay: UK evidence
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Abstract Research Question/ Issue: This paper provides new evidence on the effect of compensation consultants on CEO pay. Research Findings/ Insights: We produce new evidence on the managerial power approach (MPA) to corporate governance by examining the influence of compensation consultants on CEO pay struc... view more
Research Question/ Issue: This paper provides new evidence on the effect of compensation consultants on CEO pay. Research Findings/ Insights: We produce new evidence on the managerial power approach (MPA) to corporate governance by examining the influence of compensation consultants on CEO pay structures and the decision to hire a compensation consultant in the UK. We find evidence that is not consistent with the MPA. Contrary to the MPA predictions, we find that the positive effect of consultants on CEO pay levels mainly stems from an increase in equity based compensation. We show that consultants exert a negative influence on basic (cash) pay. In addition, we illustrate that the choice of hiring a consultant can be explained by economic determinants, e.g. firm governance characteristics. The existence of a powerful CEO does not increase the likelihood of hiring a pay consultant. The results are robust to several model specifications and tests for selection bias. Theoretical/ Academic Implications: The results indicate that compensation consultants may have a positive effect on the structure of CEO pay since they encourage incentive based compensation. We also show that economic determinants, rather than CEO power, explain the decision to hire compensation consultants. Overall, our results cast doubts on the conclusions of the MPA regarding the role of compensation consultants. Their role can be better explained within the optimal contracting framework. Practitioner/ Policy implications: This study offers insights to the positive effect the hiring of a pay consultant could have towards the design of a CEO pay contract.... view less
Keywords
corporate governance
Classification
Management Science
Method
empirical
Free Keywords
Compensation Consultants; Executive Compensation
Document language
English
Publication Year
2010
Page/Pages
p. 511-526
Journal
Corporate Governance: An International Review, 18 (2010) 6
DOI
https://doi.org/10.1111/j.1467-8683.2010.00822.x
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)