Inter-board pay differentials for directors with multiple appointments

Abstract

We analyse uniformity in the market's valuation of director human capital by comparing director compensation across firms with and without director overlaps. We find that although there is less variation in director compensation for connected boards, which share a common director, than for unrelated boards, there remains a high variation in director compensation for directors with multiple directorships. We also find that active Chief Executive Officers (CEOs), on average, command higher total director compensation in subsequent board appointments. This result holds for appointments where the individual already holds two or more directorships and is counter to the prediction of a busy director effect. Overall, our evidence suggests that active CEOs are high-quality directors or have a high disutility of additional board work and are able to command higher compensation when added to subsequent boards.

Keywords:

• board of directors
• director compensation
• connected boards
• overlapping directors

JEL Classification:

• G30
• G34
• J33

Notes

¹An exception is some boards provide an additional stipend to directors designated as financial experts.

² Ferris et al. (2003) described the business hypothesis as directors who are overcommitted by serving on multiple boards and as a result shirk their director responsibilities.

³ We choose 2004 since it is post Sarbanes Oxley and is also the last year that IRRC collects director data.

⁴ For details, see Farrell et al. (2008).

⁵ The midpoint is used so that if we have two pairs, say ($100 000, $50 000) and ($50 000, $100 000), we get the same percentage difference.

⁶ Bouwman (2011) found that director overlap leads to governance similarity and the results are driven by both directors being selected who serve on boards with similar governance practices and directors exerting influence over the governance practices after joining the board.

⁷ Note that those with more than two directorships will have an observation for each possible pairing.

⁸ Regression results are not reported, but are available upon request.

⁹ Conversely, if directors obtain bad reputations they might end up on lower paying boards. However, directors with bad reputations are unlikely to receive multiple directorships.

¹⁰ We also performed regression analysis where the dependent variable was the ordered pair compensation difference for each director under various control sets. The results and inferences are qualitatively the same as those discussed and available upon request.

¹¹ We performed regression analysis where the dependent variable was the ordered pair compensation difference for directors serving on more than two boards. The results and inferences are qualitatively the same as those discussed.