Country Analyses, Second Edition
Edited by Christine A. Mallin
Chapter 13: Compensation committees and CEO pay
Martin J. Conyon The typical large company has a compensation committee. They don’t look for Dobermans on that committee, they look for Chihuahuas – Chihuahuas that have been sedated. Warren Buffet, Chairman of Berkshire Hathaway INTRODUCTION The compensation committee is central to the executive pay-setting process. It is the subcommittee of the board of directors responsible for determining CEO compensation (Baker et al., 1988).1 The absence of an effective pay committee gives the CEO a chance to behave opportunistically and promote his or her interests at the expense of shareholder (or societal) welfare. If the CEO controls the compensation committee, he or she effectively sets his/her own pay. In such situations, compensation contracts are likely to be suboptimal and not serve shareholders’ interests. Instead, contracts are more likely to favour the CEO and other executives. For instance, CEO pay may become excessive (Bebchuk and Fried, 2003, 2004). In consequence, corporate governance theorists have long argued for strong, independent outsiders on boards. If insiders, such as former employees or relatives, are members of the committee, a potential conflict of interest arises. High pay received by CEOs is often cited as an example of board and compensation committee failure. Consider Richard Grasso, the former Chairman of the New York Stock Exchange (NYSE). In August 2003, the NYSE disclosed that he would receive $139.5 million compensation, as well as other controversial contract provisions. The storm following the announcements led to Mr Grasso’s resignation. Subsequently, he was sued by the Attorney General of New...
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