Does the age of compensation committee members matter for CEO compensation?

Abstract

Research Question/Issue

We examine the impact of the age of compensation committee (CC) members on CEO compensation. Sociological theory suggests that age is a significant demographic factor influencing behavior. We argue that monitoring intensity increases with age because older directors are more likely to commit to their fiduciary duties.

Research Findings/Insights

Using FTSE 350 firms for the period 2002 to 2017, we find that CC members' age is negatively associated with the level of CEO pay but positively associated with pay–performance sensitivity after controlling for risk aversion attitude, experience in board monitoring, knowledge of the firm, and other firm and CEO characteristics. The relationships remain robust to alternative measures for age and compensation, using two-stage least squares and high-dimensional fixed effects models. Consistent with the view that older individuals tend to hold higher ethical standards and concomitant closer monitoring, we find that age effects are sensitive to the influence of ethical factors and are strongest for those firms for which intense monitoring is most needed. This suggests that age operates via older directors carrying out their roles more assiduously. We further show that our findings are less likely to be driven by director reputational effects, and the relationship between CC member age and CEO compensation persists even when we control for multiple dimensions of culturally inherited attributes of the CC members.

Theoretical/Academic Implications

Despite the large literature on the influence of demographic characteristics on corporate governance, this study is the first on the monitoring effect of CC members' age. It contributes to the literature on the influence of demographic characteristic. It also contributes to the literature on CEO compensation by identifying a demographic factor—age—as a determinant of CEO pay, after controlling for the economic and corporate governance variables of the firm.

Practitioner/Policy Implications

This study highlights the role of demographic factors in explaining the monitoring of the CEO compensation contracting process and provides timely evidence on the recent regulatory changes.