Us knows us in the UK

On director networks and managerial compensation

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We analyze the relation between CEO compensation and networks of executive and non-executive 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.
Original languageEnglish
Pages (from-to)1132-1157
JournalJournal of Corporate Finance
Volume17
Issue number4
Publication statusPublished - 2011

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Managerial compensation
CEO compensation
Remuneration
Chief executive officer
Information gathering
Consultants
Hiring
Monitoring
Conflict of interest
Non-executive directors
Large firms
Board committees
Shareholders
Contracting

Cite this

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title = "Us knows us in the UK: On director networks and managerial compensation",
abstract = "We analyze the relation between CEO compensation and networks of executive and non-executive 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.",
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Us knows us in the UK : On director networks and managerial compensation. / Renneboog, L.D.R.; Zhao, Y.

In: Journal of Corporate Finance, Vol. 17, No. 4, 2011, p. 1132-1157.

Research output: Contribution to journalArticleScientificpeer-review

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AB - We analyze the relation between CEO compensation and networks of executive and non-executive 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.

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