New perspectives on the governance of executive compensation: an examination of the role and effect of compensation cons
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New perspectives on the governance of executive compensation: an examination of the role and effect of compensation consultants Martin J. Conyon • Simon I. Peck • Graham V. Sadler
Published online: 15 October 2009 Springer Science+Business Media, LLC. 2009
Abstract We develop a multi-theoretic approach, drawing on economic, institutional, managerial power and social comparison literatures to explain the role of the external compensation consultant in the top management pay setting institutional field. Taking advantage of recent disclosure requirements in the UK, we collect data on compensation consultant use in 232 large companies. We show that consultants are a prevalent part of the CEO pay setting scene, and document evidence of all advisor use. Our econometric results show that consultant use is associated with firm size and the equity pay mix. We also show that CEO pay is positively associated with peer firms that share consultants, with higher board and consultant interlocks, and some evidence that where firms supply other business services to the firm, CEO pay is greater. Keywords
Executive compensation Consultants
1 Introduction Understanding the determination of executive compensation has become a central issue in management research (Murphy 1999; Tosi and Greckhamer 2004). There is M. J. Conyon ESSEC Business School, Paris, France e-mail: [email protected] S. I. Peck (&) Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, OH 44106-7235, USA e-mail: [email protected] G. V. Sadler Aston University, Birmingham, UK e-mail: [email protected]
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now a voluminous literature on executive compensation, however the continued inability of researchers to fully account for the level and structure of executive pay is a clear indication that the need to develop better theory and models persists (Finkelstein and Hambrick 1996). Our paper contributes to the corporate governance literature by focusing on the role of the compensation consultant: a phenomenon largely neglected in previous theoretical and empirical research. We suggest that the role of the professional compensation consultant is central to understanding social explanations of executive compensation practices. Research on executive compensation has developed in a mature field encompassing many different disciplines (usefully summarized in Devers et al. 2007). Within that literature, the effects of governance factors on the determination and consequences of pay has become a focus. It is well known that boards of directors delegate decision making about top management pay to a compensation committee comprised of independent directors (Daily et al. 1998). For example, Daily et al. (1998) and Conyon and Peck (1998) have demonstrated that the composition of the compensation committee, in terms of the mix between insiders and independent outsiders, influences executive pay outcomes. Deutsch’s (2005) meta-analysis suggested that the proportion of outsiders was generally negatively ass
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