The differential CEO dominance–compensation and corporate governance–compensation relations: Pre- and post-SOX

We examine the relationship between corporate governance (as measured by traditional corporate governance variables and a new measure of corporate governance, called CEO dominance) and executive compensation, pre- and post-SOX. We conceptualize CEO dominance as a measure of a CEO's power and de...

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Bibliographic Details
Published in:Advances in accounting 2011-12, Vol.27 (2), p.213-222
Main Authors: Cianci, Anna M., Fernando, Guy D., Werner, Edward M.
Format: Article
Language:English
Subjects:
CEO compensation
CEO dominance
Corporate governance
Sarbanes–Oxley Act
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Summary:We examine the relationship between corporate governance (as measured by traditional corporate governance variables and a new measure of corporate governance, called CEO dominance) and executive compensation, pre- and post-SOX. We conceptualize CEO dominance as a measure of a CEO's power and define it as the difference between CEO pay and the next highest executive's pay divided by the CEO's pay. We argue that for traditional corporate governance variables, the inverse governance–compensation relation that exists pre-SOX will improve post-SOX. On the other hand, we expect a strong and positive CEO dominance–compensation relation to exist both pre- and post-SOX. Consistent with expectations, our results indicate that SOX has changed the relationship between CEO duality and compensation relation, but it has not changed the CEO dominance–compensation relation. This suggests that SOX regulatory reforms do not limit the ability of CEO power to obstruct traditional corporate governance mechanisms in extracting compensation-related rents. ► We examine corporate governance–executive compensation relation, pre- and post-SOX. ► CEO dominance, based on CEO pay, is a nontraditional corporate governance mechanism. ► SOX has changed the relationship between CEO duality and CEO compensation. ► SOX has not changed the CEO dominance–compensation relation. ► SOX does not limit CEO power to obstruct traditional corporate governance mechanisms.
ISSN:0882-6110
2590-1699
DOI:10.1016/j.adiac.2011.06.001