Tuesday, April 18, 2006

Do boards influence CEO compensation?

Kam-Ming Wan of the University of Texas at Dallas does not appear to think they do.

Dr.Wan's research findings are that:

"ownership and board characteristics have little impact on executive pay. In particular, managers are not paid less and corporate performances are not improved for boards with more representation by independent directors."

Australian evidence presented by researchers Evans and Evans is consistent with this finding:

The study examined these factors related to board quality: 1)the existence of a majority of non-executive directors on the board of directors; 2) the existence of a nomination committee and 3)participation of non-executive directors in the company's operation as evidenced by attendance at regularly scheduled board meetings.
This study found no evidence that these three variables have an impact upon the determination of CEO pay levels.

This is possibly because boards, even compensation committees, do not directly set CEO pay. The pay proposals are drafted by Human Resources and approved (or sent back to be re-evaluated) by the board. Still, one would expect a strong, independent board to exercise this veto power over disproportionate pay levels.

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