• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
Dispatches

The Independence of the Board Chairman Affects CEO Pay

A strong link exists between CEO pay and how independent the chair of the board is: Compensation for the chief executive officer is highest when an “insider” holds the board chairmanship.
Featured Tickers:

A strong link exists between CEO pay and how independent the chair of the board is.

Compensation for the chief executive officer is highest when an “insider” holds the board chairmanship. The insider is often the former CEO, though it can be also be a person who is a current employee or an officer.

Conversely, CEO compensation is lowest when the board chairmanship is held by someone who is not otherwise employed by the company.

Institutional Shareholder Services (ISS) reached these conclusions based on an analysis of 484 S&P 500 companies. The firm found 275 companies with one person serving as both the CEO and board chair. The chair was held by an insider at an additional 63 companies. An independent outsider held the chair position at 115 companies.

Average compensation was highest at companies with an insider serving as chair, at $15.6 million. The number was skewed upward by CBS Corp. (CBS), Discovery Communications (DISCA), Oracle Corp. (ORCL) and Regeneron Pharmaceuticals (REGN). The CEOs of these companies were paid, on average, in excess of $45.0 million during the three-year period studied. Discovery Communications was the highest, paying average CEO compensation of $98.1 million.

When ISS combined companies with insider, affiliated (meaning not independent) and combined chairs (one person serving both as CEO and as chair) into a single group, average total compensation was $13.9 million for the 369 companies. This was 26% higher than the $11.0 billion in average compensation paid by companies with an independent person filling the chair role.

Additional analysis ruled out the impact of industry category, CEO tenure and whether or not the CEO was new (and therefore negotiated a higher compensation package.) A company’s total revenues had some influence, but nowhere as much as board independence. ISS says the difference between an independent outsider and all other chair structures explains 88% of the difference in CEO compensation.

The report’s authors say their findings provide “some confirmation to suspicions that insiders are not the best monitors of shareholder interests in the boardroom.” They speculate that companies with more independent oversight are better able to provide an effective check to the CEO.

Source: “Board Leadership Structure: Impact on CEO Pay,” Steven Silberglied and Zachary Friesner, ISS, March 9, 2016.

Discussion

No comments have been added yet. Add your thoughts to the discussion!

You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: