The Strategist

The Connection Between The Boards of Corporate Companies And Their C.E.Os May Boost Their Pay

04/11/2015 - 14:54

The corporate networks influencing the increment of C.E.O.s salary, can affect the company’s economy as shareholders are kept in the dark., Canada – 10 April 2015 – According to research papers, reported by Huffington Post, Business – Canada, the salary of a C.E.O. should be raised by the peers. The said research study was carried out by the Ted Rogers School of Management in collaboration with Toronto’s Ryerson University wherein it reflects the fact that there are some board of corporate companies which are bound together by “exclusive networks of corporate acquaintances”. Therefore, in such scenario, keeping the pay of a C.E.O. in check may not be a trusted thing to do.
According to Ryerson’s Prof. Fei Song and the Rotman School of Management’s associate professor, Chen-Bo Zhong, the acquaintance network between corporate companies take place as many boards tend to take advices and expertise of C.O.E. from other firms. As per the researchers there is an incentive behind this kind of recommendation made by the C.E.Os. It is “to seek higher pay for the company CEO” as boosting the payment should come as a normal effect to advising other companies and proving their worth.  
The Huffington Post writes:
“There has been much criticism about the steep climb in CEO pay in North America since sunshine laws forced publicly listed corporations to reveal what they pay their top talent.”
Moreover, the justification behind the increment of the senior executives’ salaries is that in order to retain skilled people, there has be some kind of incentive otherwise the market is waiting with open arms to welcome and absorb them in. Apart from the need “of retaining skilled people”, the raised C.E.O. pay could also be the result of “a recommendation from a board of directors”, who wish to congratulate the top executive for carrying out his duty skilfully and responsibly.
In Song’s words:
"However, people who make up these boards are often CEOs of other companies themselves and are more likely to receive higher compensation packages because of this exclusive network".
The research papers of Prof. Fei Song and Chen-Bo Zhong, based on their “behavioural study”, highlights the fact that the high pay of C.E.Os affects the economy of the respective company in its other sectors which may include employee pay, shareholder returns and investment amounts. Song says:
"If executives of corporations receive a higher compensation, they may be taking the company's revenue from the shareholders' pockets and paying it to themselves".
While studying closely the behaviour of people belonging to executive corporate networks, which are formed exclusively by several “boards of directors”, Song introduced her “research subjects into groups” and urged them “to divvy up a pot of money” in a way that would prove beneficial to all the people forming part of their network, in order to gauge the level of behavioural ethics present within the members of a network.
However, what she came up with in her research papers, “published in the Journal of Economic Behaviour and Organization”, as her observation is:
"Individuals are more likely to cross moral boundaries and engage in deception for another person in the cyclic network than they would for themselves".
Talking about these “tight circles”, she describes their attitude as :
"if everyone 'helps' everyone else, everyone will be better off."
However, there seems to be no “obvious conflict” between them, though it would be difficult to track these networks and shareholders may also remain in the dark as how these network channels can influence the board’s decisions. Furthermore, it may turn out to be a closed looped chain as one companies C.E.O may be in the board of another company and vice versa. In Song’s words, it is like:
"You scratch his back, he scratches mine and I'll scratch yours".
The recommendation made by Song is to allow more information flow to the shareholders regarding the ‘’ of board meetings, so that they can check the tendency of “CEOs elevated compensation” recommended by the peers.