SOX Requirement for Outside Directors May Help Boost Pay of Celebrity CEOs

Media coverage of a CEO in a major business publication has boosted the executive's salary by as much as $1.4 million in part because that coverage affects how non-executive or "outside directors" evaluate the CEO, according to a study from the University of Colorado at Boulder Leeds School of Business.

The Sarbanes-Oxley Act of 2002 resulted in more outside directors on corporate compensation committees under the assumption that they were more impartial assessors of CEO performance. Research by Markus Fitza, a doctoral candidate at the Leeds School, shows that those outside directors are more likely to be influenced by press coverage of the CEO -- resulting in an increase in the stock options and bonus the CEO receives.

"Non-independent board members, such as members who are also firm employees and CEOs themselves, are more likely to rely on their daily experience of the CEO's contribution rather than on external sources such as newspaper articles," Fitza said in explaining the difference.

The research found that on average, an article featuring a CEO in a major business publication increased the value of the stock options and bonus the CEO received by more than $600,000. If the board had a majority of insider members, that impact was reduced by about $330,000.

CEOs increased their salaries by as much as $1.4 million with a profile in a major business publication, the research found, and a profile did not have to be flattering to produce a salary boost.

"As CEOs appear in pictures and headlines of major business magazines, they are more likely to be perceived as legitimate and efficacious," Fitza said.

The study, which examined 3,500 large, publicly traded companies from 1997 to 2005, also found that the boost in compensation generated by media coverage had no correlation to the performance of the company.