1 CEO and Director Compensation, Firm Performance and Institutional Investors: Cronyism in the UK?

This paper presents more evidence that the overpayment of CEOs and directors is symptomatic of agency problems associated with cronyism. Like Brick et al. (2006), I find a positive relation between director and CEO compensation and a negative relation between excess compensation and subsequent firm performance using a UK sample from 1998 to 2009. This paper adds to their work by showing that director excess compensation is negatively related to CEO turnover, ceteris paribus. In other words, well-compensated directors are less likely to replace CEOs. However, this negative relation is mitigated by total institutional ownership. In addition, as institutional ownership increases, the positive effect of director compensation on CEO cash compensation is also significantly reduced. Further, in firms with high levels of institutional ownership the negative impact of excess compensation on subsequent firm performance is weakened most likely due to reinforced monitoring. The fact that external monitoring by institutional investors mitigates the effects of excess compensation means excess compensation of directors and CEOs is at least partly due to agency problems related to cronyism