Board control and ceo compensation

TLDR

The board of directors functions as a primary internal control mechanism for setting CEO compensation, yet theory predicts CEOs may try to circumvent this control to maximize pay. The study tested this hypothesis with a cross‑section of 193 firms across industries, using a multiple‑indicator measure of board control derived from corporate governance literature. Results showed that CEO salaries were higher in firms with weaker board control, while firm size and profitability were not significantly related to compensation.

Abstract

Abstract The board of directors has been identified as a key internal control mechanism for setting CEO compensation. Theory suggests that CEOs will attempt to circumvent board control in an effort to maximize salary. This hypothesis was tested using a sample of 193 firms in a cross‐section of industries. Corporate governance literature was reviewed to develop a multiple indicator measure of board control. Although, as hypothesized, CEO salaries were greater in firms with lower levels of control, CEO compensation was not significantly related to firm size or profitability.