Abstract
In the current scenario of increasing social inequality, the debate over the compensation received by directors and executives of large listed companies, and its justification, has intensified. Drawing on Agency Theory and Human Capital Theory, a multilevel analytical technique is used in this paper to examine the influence of firm-level variables and director-level variables on the individual compensation of the members of the board. The results obtained for the continental European context (Spain in particular) partially support the Human Capital Theory. Nevertheless, there is no evidence supportive of Agency Theory, as corporate governance mechanisms do not contribute to moderate the compensation of directors and there is no relationship between corporate performance and the compensation of directors. The analyses by subsamples (categories of directors) reveal that non-executive director’s compensation seems to be set for a group of individuals as a whole, depending mainly on firm-level characteristics, whereas executive director compensation is more based on the unique characteristics that a particular executive brings to the board.
Highlights
In the current scenario of increasing social inequality, the debate over the compensation received by directors and executives of large listed companies, and its justification, has intensified
As intra-company variability must be explained by director level variables and inter-company variability is explained by firm level variables, these results suggest that firms set out the compensation of each executive director by taking into account the unique characteristics that this particular executive brings to the board, whereas non-executive director’s compensation seems to be set in the firm for a group of individuals as a whole
There is a large body of literature on Chief Executive Officer (CEO) remuneration, few studies have been carried out on the factors that explain the levels of compensation of the members of the boards of directors and few of these studies use individualized information on board members
Summary
In the current scenario of increasing social inequality, the debate over the compensation received by directors and executives of large listed companies, and its justification, has intensified. There is abundant literature on CEO compensation (for a review of the subject see Finkelstein et al, 2009; Murphy, 2013; Seo, 2015; Aguinis et al, 2018, or Vo & Canil, 2019), little research has been done on the factors that explain the levels. For this reason the majority of the research about the determinants of director’s compensation (Hempel & Fay, 1994; Cordeiro et al, 2000; Elston & Goldberg, 2003; Ryan & Wiggins, 2004; Linn & Park, 2005; Farrell et al, 2008; Sanchez et al, 2011; López et al, 2015; Baixauli et al, 2016, among others) uses as dependent variable the total compensation of the board or the average compensation of the members of the board (total board compensation divided by the number of directors in the board)
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