Boards with a majority of independent directors significantly decreased their CEO’s compensation in the period after new rules aimed at increasing board oversight in the aftermath of the corporate scandals in 2001 to 2002 were enacted.
A paper, written by Vidhi Chhaochharia of the University of Miami and Yaniv Grinstein of Cornell University and posted on the Harvard Law School Corporate Governance blog, compares changes in compensation between firms complying with new requirements and those that did not.
The sample surveyed 865 firms on the S&P 1500 index for the period 2000 to 2005. There were three main requirements: a single board had to have a majority of independent directors, an independent nominating committee, and an independent compensation committee.
The authors found that firms that did not comply with these requirements significantly decreased CEO compensation when the rules did go into effect, as opposed to firms that already had complied. The decrease of 17 percent took into account performance, size, firm-fixed effects, and other variables.
Significant drops in compensation occurred in boards with a majority of independent members. Compensation dropped specifically in bonus and stock-related components of compensation packages.
Chhaochharia and Grinstein concluded that new board requirements did, in fact, affect CEO compensation decisions.