Wolves in the Hen-House? The Consequences of Formal CEO Involvement in the Executive Pay-Setting Process

Abstract

New Zealand firms exhibit significant variation in the extent to which they formally involve CEOs in the executive pay-setting process: a considerable number sit on the compensation committee while others are excluded from the board altogether. Using 1997-2005 data we find that CEOs who sit on the compensation committee obtain generous annual pay rewards that have low sensitivity to poor performance shocks. By contrast CEOs who are not board members receive pay increments that have low mean and high sensitivity to firm performance. Moreover the greater the pay increment attributable to CEO involvement in the pay-setting process the weaker is subsequent firm performance over one three- and five-year periods.