Equity-basedcompensation and OldBoy networks in the UKStavroula Iliopoulou (Royal HollowayUniversity of London)Jerry Coakley (University of Essex)

The issues Sharp increases in UK executivecompensation Failure of traditional, agency theorymodels to curb compensation levelsand practices: Pay higher thanProfitability…Negligence of Agency formulationsto consider POWER as a predictor of pay?? Managerial power theories haveemerged: market outrage is the onlyconstraint to self-serving.

The issues Board dependence on CEO’s knowledge offirm creates a Power Basis for the CEO(Conyonand Peck, 1998)…Hisacquaintances may increase his prospectsfor hiring preferred external directors Gap in empirical examination of payrelative to within-firm AND intra-industrystructures such as CEO and boardinterlocks and industry concentration

Contributions1. Separately investigate the effect ofequity-pay on incentives for high and lowconcentration (Herfindahl Index)industries: Media; Telecoms;industries: Media; Telecoms;Engineering & Machinery; WaterAim: : study the effect of powerfulcompetitors (oligopolistic industries) onpay levels and practices AND onmanagerial networks/demand for CEOservices.

Contributions2. Elaborate on the 4 main sources of CEOpower (identified in management &sociology) :Structural: governance characteristicsOwnershipExpertiseNetworkAim: : First UK study to empiricallyestimate the effect of power on CEOintensity of incentives and the mixbetween option-related and cash pay.

Contributions3. Investigate the factors explaining CEOinterlocking and offer comparisonsbetween high and low concentrationindustriesAim: : examine the role of the (market)value of CEO human capital and thepower derived from it to shed light onwhat drives the demand of CEO servicesand on puzzles in the current literature(Murphy, 2002: “CEO successions with no tieswith the Board enjoy attractive pay packages”).

Expansion of Interlocking directorates19972001

Equity-pay IncentivesEquity-pay Incentivesititit15it14it13it12it11it10it9it8it7it6it5it4it3it2it101itDdepartDnewjoinSizesizeBoardLeverageDdivLOCEx/NETobin QTSRTenureAgeResponsibilityDualityOwnershipYεδνββββββββββββββββ++++++++++++++++++=+ititit15it14it13it12it11it10it9it8it7it6it5it4it3it2it101itDdepartDnewjoinSizesizeBoardLeverageDdivLOCEx/NETobin QTSRTenureAgeResponsibilityDualityOwnershipMεδνγγγγγγγγγγγγγγγγ++++++++++++++++++=+Mix of Equity & Cash payMix of Equity & Cash pay

Pay FindingsMain Findings: Intensity of incentives from options decreases(increases) with CEO (Board) ownership andwith CEO multiple board memberships Loss of office compensation decreases pay-performance sensitivities for CEOs and Boards Significant differences between the amountsand incentives between more/less concentratedindustries:– Ownership reduces incentives for more competitive(low HHI) CEOs– Mix and board size: Less competitive (high HHI) usemore incentive-related pay relative to cash!

CEO interlocking Interlocks: most likely links to havea ‘strategic salience’ for the firmsconcerned. Belonging to a network ofinterlocking directorates may offermarket visibility, high social status &access to resources…and Power:– Submissive Boards to a CEO withprivileged access to resources– Boards identifying with CEOs of a highersocial class

CEO interlocking Top management overlaps/interlocksmay also affect compensationpractices:– Reduction or augmentation ofcompetitiveness among firms (Quest toattract managerial talent)– Creation/Harmonisation of pay practicesnot necessarily related toperformance/incentives

DinterlockProbability of Interlockingit= ë+++ë0ëë51014+ ë (salary + bonus)1ExperienceBoardTSRit+reputationëit15+ë6PrestigeTenureitit+it+ë+it11îëVOPT/TPBoard Less concentrated industries (with higherlevels of compensation) are more ofteninvolved in interlocks As are CEOs with high ownership…soAre Interlocks used as a vehicle to increaseCEO reputation and consequently hisPower?i2+ë7+ õtDuality+payåititit+it+ë+ë3Ownershipë128BoardSizeit+sizeëit13+itë+4Ageë9Tobin QNE CEOititit

CEO social reputation Social reputation: number of BoDs CEO isa member Examine firm characteristics and how theyaffect the demand for CEO’s services We elaborate on the main sources ofmanagerial power (Filkenstein(Filkenstein, , 1992):– Structural: Ex/NE; Pay; Other firm CEOs;– Ownership– Expert: Yrs Experience; Board pay– Prestige: Board members’ interlocks; CEOseats in US firms; CEO elite titles

Count_seatsit= ë++ëë5100CEO social reputation+ëTitle1BoarditCashPayreputation+ë11it+Ex/NEOwnershipDConcentration Demand for CEO services depends upon thegrowth opportunities and the sector of theparent firm– CEOs in less concentrated industries (high growthfirms) hold more (less) outside seats Pay not a strong signal of ability? No effectof pay on CEO multiple board participation “Sources of Power” increase the (market)demand for CEO services:– NED CEO– Ownership– Board reputation & Foreign seatsitëit2++ë6ëBoard12it+payitë3+Experienceë7Sizeitit+ å+ititë8+ë4Tobin QNED CEOit+ë9itForeign_seatit

Conclusions Unique contributions to the executivecompensation literature (the financecommunity has previously neglected)– The role of industry concentration onpay, incentives and demand for CEOservices– The effect of firm characteristics andmanagerial Power on the demand forCEO services

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