Zhang, Zhifang and Hass, Lars Helge and Vergauwe, Skralan and Conyon, Martin (2017) Essays on CEO compensation and corporate governance. PhD thesis, Lancaster University.
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Abstract
This thesis examines the determinants of CEO compensation. It consists of two main studies. The first investigates the effect of compensation consultants on CEO pay levels and incentives, using a sample of large UK firms from the FTSE 350 index from 2003 to 2011. Its key focus is whether the effect of compensation consultants persists after controlling for endogeneity. Using OLS regressions and controlling for firm, CEO and corporate governance characteristics reveals that the presence of compensation consultants is positively associated with both CEOs’ pay level and the percentage of equity-based pay. However, the presence of compensation consultants is endogenous. After controlling for selection bias using firm fixed effects, CEO fixed effects and propensity score matching, no significant correlation is found between compensation consultants and the level and composition of CEOs’ pay. This study also investigates the effect of governance quality, and finds that the effects of compensation consultants are different in firms with good and bad governance. Again, there is no evidence that compensation consultants are used by entrenched CEOs to increase total pay, even in firms with bad governance. In general, these results support optimal contracting models rather than managerial power models. The second study investigates the relationship between foreign experience and CEO compensation using a sample of large UK firms from the FTSE 350 index from 2003 to 2011. It focuses on determining whether foreign experience is valuable to CEOs. The findings reveal that foreign CEOs and national CEOs with foreign working experience receive significantly higher levels of total compensation than those without, and that this foreign-CEO pay premium is stronger in firms that are more globalised. The results are robust to controlling for firm-specific economic and corporate governance characteristics, as well as endogenous CEO selection using propensity score matching. The results show that pay premiums are attributable to the specialist foreign expertise and foreign networks of CEOs, which stem from foreign experience rather than broader general managerial skills.