Investigating Excess Compensation: An Empirical Study of Board Compensation CEO Compensation and Future Firm Performance

Christian Hesselaa Nielsen & Frederik Ravn Bilberg

Student thesis: Master thesis


The financial crisis of 2007-2008 ignited the discussion of compensation packages and corporate governance practices in the US. By empirically studying 411 S&P 500 firms from 2010-2015 (2,466 firm-years), we model board compensation, CEO compensation, and future firm performance using a number of corporate governance and firm characteristics. We find that board compensation is positively impacted by the number of directors on the board. However, when the CEO simultaneously is the chairman of the board, this has a negative impact on board compensation. Using a measure for excess board compensation, we find support for a mutual back-scratching relationship, as excess board compensation has a significant positive impact on CEO compensation. We hypothesize that this relationship reflects cronyism, resulting in boards favoring status quo when being overcompensated. Similarly, we find CEO duality to have a positive impact on CEO compensation, while CEO shareholding has a negative impact. Moreover, we find that excess board compensation leads to lower future firm performance. We argue that this could be due to cronyism and poor board culture. Lastly, we unexpectedly find that excess CEO compensation has a positive impact on future firm performance. This could suggest that excessive financial incentives constitute effective mechanisms to align interests between shareholders and the CEO.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2018
Number of pages122