CEO Compensation and Board Structure Revisited – Addendum

Abstract

Using Chhaochharia’s and Grinstein’s (JF, 2009) data and methodology, Guthrie, Sokolowsky, and Wan (JF, 2010) document that compensation committee independence leads to an increase in executive pay, and that the increase is concentrated in firms with powerful monitors. These findings stand in sharp contrast to the prediction of the managerial power hypothesis that director independence effectively curbs rent extraction in the form of excessive CEO pay. While it is tempting to reject the managerial power hypothesis, the evidence alternatively calls into question the effectiveness of director independence in corporate governance or the importance of reducing CEO pay to directors. In this addendum, we discuss these two possibilities.