Board Interlocking Network and the Design of Executive Compensation Packages

Wong, Ling Heng; Gygax, André F.; Wang, Peng

doi:10.2139/ssrn.965991

Cited by 19 publications

(21 citation statements)

References 67 publications

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“…Our findings pertaining to the equity‐based portion of CEO pay are consistent with the findings presented in Wong, Gygax and Wang () and Gallani (). However, neither of these studies examines the effect of director networks on a CEO's delta or vega.…”

supporting

confidence: 92%

“…Our study relates to Bouwman (), who examines how governance practices propagate across firms and finds that observed practices are partly the outcome of network effects among firms sharing directors. Our study also relates to Wong, Gygax and Wang () and Gallani (), who find that board interlocks lead to similarities in the composition of executive pay . In pursuit of a better understanding of the economic forces behind such influences, we extend these studies and examine in more detail how director networks are used to set CEO pay.…”

Section: Introductionsupporting

confidence: 71%

“…The interaction of overlapping directors forms a social network of influence through which various corporate policies propagate. Research has established the importance of director networks for firm policies such as options backdating (Bizjak, Lemmon and Whitby, ), earnings management (Chiu, Teoh and Tian, ), various measures of corporate governance practices (Bouwman, ), tax avoidance strategies (Brown and Drake, ), board compensation (Boivie, Bednar and Barker, ), and the composition of executive compensation and incentives (Wong, Gygax and Wang, ; Gallani, ).…”

Section: Introductionmentioning

confidence: 99%

“…In pursuit of a better understanding of the economic forces behind such influences, we extend these studies and examine in more detail how director networks are used to set CEO pay. Unlike Wong, Gygax and Wang () and Gallani (), who are concerned with the composition of executive pay, our main focus is on total CEO pay. Similar to Bouwman (), we use a simpler approach than Wong, Gygax and Wang () and Gallani () and focus on the direct links between firms, while still exploring the relevance of indirect links.…”

Section: Introductionmentioning

confidence: 99%

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How Firms Use Director Networks in Setting CEO Pay

Cherry

Gatchev

2019

The Financial Review

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We examine how firms use the network of overlapping directorships to determine chief executive officer (CEO) compensation. We contribute to related work by empirically exploring two competing hypotheses. In the first hypothesis, networks propagate relevant information used to establish good pay practices. In the second hypothesis, director networks are used opportunistically to benefit the CEO. The empirical findings are generally consistent with the first hypothesis. Yet, the importance of director networks is reduced when the CEO is entrenched and when management hires a compensation consultant. The latter finding is especially pronounced when director networks predict a reduction in CEO pay.

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supporting

confidence: 92%

Section: Introductionsupporting

confidence: 71%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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How Firms Use Director Networks in Setting CEO Pay

Cherry

Gatchev

2019

The Financial Review

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“…The more restrictive definition of board interlocks proposed by Knowles (1973) is, therefore, more appropriate for a study of compensation design. and the relative weight assigned to cash and equity-based components of CEO pay (Wong and Gygax 2009;Conyon et al 2011) Whereas effective compensation design should drive boards to internalize compensation practices adopted by others only to the extent that they correspond to structural, strategic, and organizational similarities, two main factors interfere with the pursuit of this goal. First, board members often lack formal training in compensation design, which is a complex task involving significant uncertainty.…”

Section: Board Interlocksmentioning

confidence: 99%

Through the Grapevine: Network Effects on the Design of Executive Compensation Contracts

Gallani¹

2015

SSRN Journal

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Effective design of executive compensation contracts involves choosing and weighting performance measures, as well as defining the mix between fixed and incentive-based pay components, with a view to fostering talent retention and goal congruence. The variability in compensation design observed in practice is significantly lower than it would be predicted by contracting theory. This is likely due to indirect constraining pressures, which cannot be completely explained by industry affiliation or peer group membership. I posit that network connections involving corporate boards operate as a conduit for these pressures. Using information disclosed in proxy statements of publicly traded companies, and a vectorial approach to measure compensation similarity, I predict and find that firms that are connected by board interlocks, hiring the same compensation consulting firm, or sharing a blockholder, exhibit a higher degree of similarity in the design of executive compensation contracts than what would be predicted by similarities in organizational characteristics. The relative prominence of the connectors within the respective networks moderates the network effects on the degree of compensation similarity. Finally, I show that the market responds positively to compensation similarity, although it is associated with excess CEO compensation.

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Exponential random graph models for the Japanese bipartite network of banks and firms

et al. 2019

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We use the exponential random graph models to understand the network structure and its generative process for the Japanese bipartite network of banks and firms. One of the well known and simple model of exponential random graph is the Bernoulli model which shows the links in the bank-firm network are not independent from each other. Another popular exponential random graph model, the two star model, indicates that the bank-firms are in a state where macroscopic variables of the system can show large fluctuations. Moreover, the presence of high fluctuations reflect a fragile nature of the bank-firm network.We show the phase diagram of the model in (B − J) plane in Fig. 3. It has three distinct regions -high density, low density and co-existence phase. Our

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Board Interlocking Network and the Design of Executive Compensation Packages

Cited by 19 publications

References 67 publications

How Firms Use Director Networks in Setting CEO Pay

How Firms Use Director Networks in Setting CEO Pay

Through the Grapevine: Network Effects on the Design of Executive Compensation Contracts

Exponential random graph models for the Japanese bipartite network of banks and firms

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