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CEO Compensation and Board Structure Revisited





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    • Katherine Guthrie is at the Mason School of Business, College of William and Mary; Jan Sokolowsky is at the University of Michigan; and Kam-Ming Wan is at the School of Accounting and Finance, the Hong Kong Polytechnic University. This paper combines two earlier drafts: “CEO Compensation and Board Structure Revisited” by Guthrie and Sokolowsky (2009) and “Can Boards with a Majority of Independent Directors Lower CEO Pay?” by Wan (2009). We thank Vidhi Chhaochharia and Yaniv Grinstein for sharing the majority of the data used in Chhaochharia and Grinstein (2009). We particularly thank John Graham (the Editor) and Mike Lemmon (the Associate Editor) for their guidance. We thank Zhonglan Dai, Harold Demsetz, John DiNardo, Y.K. Fu, Han Kim, Jay Ritter, Wing Suen, Rong Wang, Scott Weisbenner, Harold Zhang, and seminar participants at Drexel University and the University of Texas at Dallas for helpful comments and suggestions. Kam-Ming Wan is especially grateful to Armen Alchian for his encouragement to study the effect of board structure on executive compensation and acknowledges research support from the University of Hong Kong and the Hong Kong Polytechnic University.

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Chhaochharia and Grinstein estimate that CEO pay decreases 17% more in firms that were not compliant with the recent NYSE/Nasdaq board independence requirement than in firms that were compliant. We document that 74% of this magnitude is attributable to two outliers of 865 sample firms. In addition, we find that the compensation committee independence requirement increases CEO total pay, particularly in the presence of effective shareholder monitoring. Our evidence casts doubt on the effectiveness of independent directors in constraining CEO pay as suggested by the managerial power hypothesis.