Does Independent Advice to the Board Affect CEO Compensation?

This article investigates the role external advice plays in the board’s determination of chief executive officer (CEO) compensation. We show that CEO incentive pay increases with the degree of compensation consultant independence using a quasi-natural experiment provided by the creation of an indepe...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial and quantitative analysis 2021-03, Vol.56 (2), p.693-744
Main Authors: Bakke, Tor-Erik, Mahmudi, Hamed
Format: Article
Language:English
Subjects:
Advisors
Boards of directors
Chief executive officers
Chief executives
Compensation
Conflicts of interest
Consultants
Corporate governance
Executive compensation
Experiments
Incentives
Investment advisors
Meetings
Peers
Performance evaluation
Quantitative analysis
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This article investigates the role external advice plays in the board’s determination of chief executive officer (CEO) compensation. We show that CEO incentive pay increases with the degree of compensation consultant independence using a quasi-natural experiment provided by the creation of an independent consultant after separation from an affiliated consultant. Specifically, switching to an independent consultant significantly increases the pay–performance sensitivity and relative performance evaluation of CEO contracts. Despite the benefits of independent advice, independent consultants may not be hired due to the influence of powerful CEOs or because boards already possess adequate expertise.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109019001030