EVIDENCE ON BOARD SIZE AND ITS IMPACT ON CEO PAY-PERFORMANCE SENSITIVITY

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Ning Gao, Kenneth Small ORCID logo

https://doi.org/10.22495/cocv7i4c2p1

Abstract

Recent literature asserts that board size is one of the crucial determinants in board monitoring. We conjecture optimal board size leads to effective and efficient decision-making. Using a U.S. firm sample from year 1996 to 2005, we examine whether board size has any impact on one of the main tasks of board monitoring – appropriate compensation for CEOs. Specifically, we investigate if board size is associated with CEOs’ pay-performance sensitivity. Agency theory suggests top managers’ compensation be structured in alignment with shareholder wealth. If a board is vigilant, managers who create (destroy) wealth should be rewarded (penalized). By using value added models, we construct a new sensitivity measure of CEO compensation to wealth added per share. Our findings indicate that there is a non-linear relationship between board size and CEO pay-performance sensitivity. As the board size becomes bigger, the pay-performance sensitivity follows a pattern that first increases and then decreases.

Keywords: Corporate Governance, Executive Compensation, Agency Theory, Managerial Incentives

How to cite this paper: Gao, N., Small, K. (2010). Evidence on board size and its impact on CEO pay-performance sensitivity. Corporate Ownership & Control, 7(4-2), 233-251. https://doi.org/10.22495/cocv7i4c2p1