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Director interlocks, corporate governance, and CEO compensation

posted on 22.02.2017, 02:26 by Ghafoori, Eraj
Determinants of CEO pay and its alignment with firm performance have been a topic of considerable debate for over a decade. Thus far, the evidence examining the effectiveness of governance mechanisms on CEO pay is mixed at best. As such, the aim of this study is to provide an alternative explanation by investigating the joint effects of director interlocks, measured as firm centrality, and corporate governance quality on CEO pay. This is supported by combining agency and resource dependence theories, thus providing a joint theoretical lens to study determinants of CEO pay and its alignment with firm performance. A large sample, comprising 4,859 firm observations across the US S&P1,500 from 2007 to 2010, was collected from Compustat, ExecuComp, and RiskMetricks databases. Four separate proxies for firm centrality were measured: Degree, Eigenvector, Betweenness, and Closeness centrality. Thomson Reuters ASSET4 Corporate Governance Index (TRACGI) was used to measure governance quality. The resulting unbalanced panel data were then analyzed using random effects mixed models. Results show that director interlocks are positively associated with CEO pay. This association is moderated by corporate governance quality. The study shows that in low governance conditions, there is a more significant positive association between network centrality and CEO pay when compared to high governance conditions. Thus, governance quality attenuates the positive association between firm interlocks and CEO pay. A number of additional analyses were conducted, confirming that results are not dependent on extraneous factors such as the impact of the global financial crisis or firms operating in the finance sector. This study makes several contributions. First, it contributes to theory by providing a new theoretical lens resulting from the interconnection of two theories to studying determinants of CEO pay. Second, it contributes to practice by informing governments, policy makers, and auditors of the significant impact of director interlocks on CEO pay in addition to corporate governance. Finally, this study makes a methodological contribution by applying a more comprehensive measure of corporate governance to studying CEO pay and director interlocks than that incorporated in prior research.


Campus location


Principal supervisor

Giles Hirst

Additional supervisor 1

Michaela Rankin

Year of Award


Department, School or Centre



Doctor of Philosophy

Degree Type



Faculty of Business and Economics