The nexus between effective corporate monitoring and CEO compensation

Abstract

Managerial compensation to top executives, particularly to CEO, has remained a topic of continuing interest in corporate finance literature. Corporations are required to pay a handsome amount to attract and motivate competent business executives to get their jobs done in a befitting manner. Accordingly, executives try to grab a higher level of compensation for themselves which might be at the cost of harming firm value and shareholders' interests. In this context, various governing mechanisms have been introduced to effectively monitor this opportunistic behaviour of executives. In this context, the current study empirically evaluates the impact of different corporate governance monitoring mechanisms such as institutional shareholders' ownership and activism, independence of boards and audit committees, and presence of blockholders in the company on the level of compensation paid to a CEO. The results revealed that more independent board and audit committee members meeting more frequently is helpful in mitigating the higher level of CEO compensation. Moreover, higher financial institutional ownership found positively related to CEO compensation which is in accordance with strategic alliance hypothesis between managers and sponsoring financial institutions.