Paper Clip: Composition of the Board and CEO’s Compensation

The financial crisis of 2008-09 brought into focus the issue of CEO and top management compensations. These enormous salaries, mostly seen as being completely out of line with performance, gave rise to questions about corporate governance. The new Companies Act mandates Board structures and processes that seek to promote good corporate governance practices.

More women on Board may check CEOs’ salaries

The first-of-its-kind study investigates the efficacy of Board diversity and Board independence for different ownership structures and different types of concentrated owners — private domestic, private foreign, government — in influencing CEO compensations in the same economic setting. It provides theoretical observations and actionable inputs for changes in law and corporate governance structures.

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The research sample included companies that were part of the diversified 100 stock index of the National Stock Exchange during the period 2007-12. The main theoretical contribution is that the impact of Board diversity and Board mechanisms is moderated by the type of concentrated ownership. The findings recognise that corporate governance variables advocated in advanced western economies may not be universally effective in all contexts.

Separating the positions of Board chair and CEO is the most important governance measure to check over-large CEO salaries. Other Board mechanisms to check executive compensations act along expected lines only for firms with dominant foreign owners.

Gender diversity — in the sense of having women directors on Boards — and a large number of non-executive independent directors deflate CEO compensation only in the case of companies where the dominant owners belong to foreign countries.