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CEO Presence on the Compensation Committee: A Puzzle

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Date

2012

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Te Herenga Waka—Victoria University of Wellington

Abstract

Conventional wisdom suggests that CEO membership of the compensation committee is an open invitation to rent extraction by self-serving executives. However using data from New Zealand - where CEO compensation committee membership is relatively common - we find that annual pay increments for CEOs with this apparent advantage averaged six percentage points less than those enjoyed by other CEOs during the 1997-2005 period. After controlling for variation in firm performance the difference is a still-sizeable four percentage points. This puzzling result cannot be explained by risk-return tradeoff considerations interaction with other governance variables selection bias or variable mis-measurement.

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