Social Econ Blog

A study of S. & P. 500 companies, by Amir Barnea and Ilan Guedj, finance professors at the University of Texas, found that, even after other factors were accounted for, C.E.O.s at companies whose directors sat on a number of other boards were paid thirteen per cent more than C.E.O.s at companies whose directors were not.

Why? One reason is that the more connections board members have, the more likely they are to end up with what you could call “friend of a friend” links to the company’s C.E.O. A recent study by a team of business-school professors mapped the social networks of twenty-two thousand directors at more than three thousand companies, charting the degrees of separation between directors and C.E.O.s, and found that at companies where there are what the study’s authors termed “short, friendly” links between directors and executives C.E.O.s are paid significantly more. But even in the absence of this kind of explicit back-scratching the tight connections between board members insure that, once an idea takes hold at a few companies, it’s easier for it to spread, in a viral fashion. A host of studies have found that network ties affect how likely companies are to adopt anti-takeover strategies, to embark on specific types of acquisitions, and even to change their organizational structures. The same effect is observable in the matter of C.E.O. pay: Barnea and Guedj found that board members at companies where C.E.O. pay was high were more likely to support high pay when they sat on other companies’ boards as well. And, as with any virus, some people are more potent transmitters: Kenneth Langone, the board member who engineered Nardelli’s hiring at Home Depot, was also the head of the compensation committee that approved Dick Grasso’s extravagant payday at the New York Stock Exchange, and was on the G.E. board’s compensation committee that approved Jack Welch’s luxurious retirement package. Langone is what an epidemiologist might call a supercarrier of the executive-pay virus.

// posted by BW @ 4:34 PM