How institutional directors on boards affect CEO compensation

Abstract

The aim of this paper is to study the impact of institutional directors on boards on CEO compensation. Concretely, we investigate the influence of institutional directors as a whole group, differentiating them into institutional directors with business ties with the business where they sit on boards (pressure-sensitive directors) and into institutional directors without business relationships (pressure-resistant directors). We hypothesise that there is a positive or negative association between institutional, pressure- sensitive and pressure-resistant directors on boards and CEO compensation, respectively. Our results give evidence that CEO compensation decrease with a higher presence on boards of institutional directors and pressure-resistant directors, while pressure-sensitive directors on boards do not affect. Consequently, these conclusions support the idea that institutional directors on boards cannot be considered a homogeneous group and so, they play an important role in management control and payment regulations.