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

• Published date: 01 July 2024
• Author: Yiwei Li,Michael Clements,Carol Padgett,Xiu‐Ye Zhang
• Date: 01 July 2024
• DOI: http://doi.org/10.1111/corg.12560

ORIGINAL ARTICLE

Does the age of compensation committee members matter for

CEO compensation?

Yiwei Li

1

| Michael Clements

2

| Carol Padgett

3

| Xiu-Ye Zhang

3

1

Essex Business School, University of Essex,

Colchester, UK

2

ICMA Centre, Henley Business School,

University of Reading, Whiteknights, Reading,

UK

3

Research School of Accounting, Australian

National University, Canberra, Australia

Correspondence

Xiu-Ye Zhang, Research School of Accounting,

Australian National University, Canberra 2600,

Australia.

Email: xiu-ye.zhang@anu.edu.au

Abstract

Research Question/Issue: We examine the impact of the age of compensation com-

mittee (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 aver-

sion 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 influ-

ence of demographic characteristic. It also contributes to the literature on CEO com-

pensation 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 fac-

tors in explaining the monitoring of the CEO compensation contracting process and

provides timely evidence on the recent regulatory changes.

Received: 18 February 2022 Revised: 26 August 2023 Accepted: 30 August 2023

DOI: 10.1111/corg.12560

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any

medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

600 Corp Govern Int Rev. 2024;32:600–624.

wileyonlinelibrary.com/journal/corg

KEYWORDS

corporate governance, age, CEO compensation, compensation committee, monitoring intensity

1|INTRODUCTION

CEO compensation has consistently attracted attention from business,

academia, and policymakers. In the United Kingdom, in particular, this

topic has come under thespotlight in recent years, and regulators have

intensifiedreforms in response to calls from the media and stakeholders

to curb “excessive”CEOcompensation. The literature documents mul-

tiple corporate governance factors influencing CEO compensation.

However, there is limited research on the role of the compensation

committee (hereafter CC), which is the body directly responsible for

setting the pay of the CEO. In the literature, several studies examine

the association between the independence of the CC and the level

of CEO pay, or pay–performance sensitivity (e.g., Anderson &

Bizjak, 2003;Bebchuketal.,2010; Daily et al., 1998; Newman &

Mozes, 1999). Other studies examine the quality of the CC, the CC

composition,CC processes, and the task separation betweenthe differ-

ent board committees (e.g., Das et al., 2020; Hermanson et al., 2012;

Laux & Laux, 2009; Sun & Cahan, 2009). Malsch et al. (2012) adopt a

cultural perspective to examine how CC members'ways of thinking and

acting affect compensation outcomes.

Research in the social sciences has demonstrated the importance

of demographic factors as influences of individual behavior and, in

turn, therefore of corporate management and governance activities

(e.g., BenAmar et al., 2013; Hambrick et al., 1996; Hambrick &

Mason, 1984; Kosnik, 1990; Pfeffer, 1981,1985). Yet our under-

standing of whether demographic characteristics of the CC affect

CEO compensation is limited. In a related area, Dao et al. (2013)

examine the effect of the age of the audit committee on the cost of

equity capital. However, such factors are rarely examined for CC

members, with a few exceptions that have explored gender diversity

and the tenure length of CC members (Bugeja et al., 2016; Harris

et al., 2019; Vafeas, 2003). The potential importance of age, as a

determinant of CEO compensation, remains unexplored.

To bridge this gap, we investigate whether the age of the CC

members affects CEO compensation. To the best of our knowledge,

no study has investigated the effects of the age composition of CCs.

Existing research suggests that people acquire higher ethical stan-

dards as they age (e.g., Dawson, 1997; Deshpande, 1997;

Mudrack, 1989; Pfeffer, 1985; Rhodes, 1983). Building upon these

findings in sociological and psychological research, studies on corpo-

rate management and governance have considered the possibility of

an age effect with regard to the principal–agent problem. As an exam-

ple, the age of CEOs has been found to be positively related with

higher quality financial reporting, suggesting that higher ethical, and

more conservative, standards are possessed by older people (H.-W.

Huang et al., 2012). In contrast, firms with younger CEOs are more

likely to experience stock price crashes (Andreou et al., 2017). If age

affects ethical standards and behavior, one might conjecture that the

age of the compensation monitors—that is, of the CC members—might

also influence their deliberations concerning CEO compensation.

We suggest that age may affect the monitoring activities of CC

members in two ways. First, the fulfillment of fiduciary duties by

CC members not only relies on statutory regulations but is also guided

by the individuals' own ethical standards. Although “high levels”of

CEO compensation may be justifiable on economic grounds—

reflecting economic efficiency—there are also ethical implications

(see, e.g., Edmans et al., 2017; Neeley & Boyd, 2010; Piketty, 2014;

Piketty & Saez, 2003; Rost & Weibel, 2013; Wilhelm, 1993). Older CC

members may be more likely to respond to these, and to restrain CEO

pay. Second, directors themselves also face agency problems and may

be led by their own interests. The extent to which agents act in an

ethical manner is affected by the costs and benefits of taking various

actions (Trautmann et al., 2013). Older committee members may be

less likely to be concerned with the prospect of losing out on future

directorships by being overly strict and may be more likely to attempt

to rein in compensation settlements and monitor CEO pay more

intensively. Alternatively, older members approaching retirement may

in fact be less diligent in terms of their monitoring activities and

may lack the zeal of younger members. It is an empirical question

which of the opposing effects of age dominates.

We examine the effect of CC members' age on CEO compensa-

tion by focusing on two important aspects, the level of pay and the

pay–performance sensitivity. These two aspects serve as a major

focus of prior research into agency problems associated with CEO

compensation (e.g., Chhaochharia & Grinstein, 2009; Gormley

et al., 2013; Hagendorff & Vallascas, 2011; Q. Huang et al., 2017). In

addition, the level of CEO compensation and the pay–performance

sensitivity both have ethical implications. High executive pay can

adversely affect income inequality and may foster perceptions of

injustice within the company (Piketty, 2014; Piketty & Saez, 2003);

and low sensitivity of CEO compensation to firm performance may

also harm employee morale (Wilhelm, 1993). Therefore, CC members

with higher ethical standards may be concerned with both these con-

stituents of the compensation package.

Our sample of firms is collected from UK FTSE 350 index compa-

nies for the period 2002 to 2017. We find that CC members' age is

negatively associated with the level of CEO pay but positively associ-

ated with pay–performance sensitivity after controlling for the atti-

tude to risk, experience in board monitoring, knowledge of the firm,

and other firm and CEO characteristics. The relationship remains

robust to alternative measures for CEO compensation (such as excess

compensation and scaled total compensation) and dimensions of age

(such as the age of the CC chair).

Age may be associated with other qualities or characteristics that

simply parallel the effects of age on compensation. We make every

effort to determinethe true effect of age, by includingan extensive set

LI ET AL.601