CEO presence on the compensation committee: a puzzle

The managerial power view of executive compensation suggests that CEO membership of the compensation committee is an open invitation to rent extraction by self-serving executives. However, using data from New Zealand – where CEO compensation committee membership was relatively common until quite recently – we find that annual pay increments for CEOs with this apparent advantage averaged four percentage points less than those enjoyed by other CEOs during the 1998–2005 period. This puzzling result cannot be explained by omitted governance variables, risk-return tradeoff considerations, selection bias, or compensation mis-measurement. We find some weak evidence suggesting it may be consistent with a form of optimal contracting.

► We examine the effect of compensation committee membership on CEO pay.
► We find that CEOs on the compensation committee are paid less on average.
► Differences in firm performance and governance cannot explain this result.
► Risk-return and selection considerations cannot explain this result.
► A form of optimal contracting may explain this result, but we find only very weak support.