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