What Are Friends for? CEO Networks, Pay and Corporate Governance

What is it about?

We investigate the impact of CEO networking on compensation arrangements. Unlike existing studies that are largely based on board interlocks, we use a unique measure that calculates the direct ties the CEO has created during her life. We show that a CEO’s compensation is significantly affected by her power in the managerial labour market. We find that the size of the CEO network is positively related to the level of CEO compensation and inversely related to its pay-performance sensitivity. We interpret our results as direct evidence that managerial power influences compensation. However, in firms where shareholders rights are well protected, the impact of the CEO network over pay arrangements diminishes. This implies that outrage cost and governance reduces managerial power in pay negotiation. Overall, our results are consistent with the predictions of the managerial power approach.

Featured Image

Why is it important?

CEO's social networks have important impact on their compensation. Those have greater network have higher compensation and their compensation is less related to performance. These observations suggests CEOs who are well connected thus more powerful may undermine shareholders' value.