Step In, Step Out: The Dynamic Relationship Between Interlocking Directors and CEO Compensation

Abstract

Combining literature on CEO pay-setting process, board processes, and group norms, this study explores the influence of interlocking director dynamics on subsequent CEO pay raises. Particularly, we focus on two types of interlocking director changes—the loss and addition of interlocking directors—and consider their independent influence on CEO pay raises. Moreover, we hypothesize that the relationship between interlocking director dynamics and subsequent CEO pay raises is contingent on the CEO relative pay (of the changing interlocked firms vs. the focal firm), female board representation, and the interaction between these two moderators. Based on 4,510 firm-year observations from 702 S&P firms over 10 years (2009-2018), we found that interlocking director loss is negatively associated with subsequent CEO pay raises, yet there is no significant influence of interlocking director addition on subsequent CEO pay raises. The findings also partly support the moderating roles of the CEO relative pay, female board representation as well as the three-way interactions among interlocking director changes, CEO relative pay and female board representation. This study advances our understanding about the implications of interlocking director changes, determinants of CEO pay adjustments, and the board functioning processes.