Giving to get: how self-serving interests of CEO directors drive up CEO pay

Prior research offers preliminary evidence that outside CEO directors on a firm’s board of directors are associated with higher CEO compensation. However, research to date has not looked into the various incentives of these outside CEO directors to grant the CEO higher compensation. In this study, we focus on the self-serving incentives of CEO directors on compensation committees. That is, we study whether the presence of CEO directors on a firm’s compensation committee drives compensation upwards because of peer group benchmarking practices at the CEO director’s home firm. Our results show that the shorter the distance between a CEO director’s home firm and the firm where she sits on the compensation committee, the more likely it is that CEO compensation is biased upward in the focal firm. This effect is especially pronounced for greedy CEO directors. With this study, we provide direct evidence of a potential conflict of interest caused by compensation benchmarking when active CEOs sit on other firms’ compensation committees