Yes, it pays to be friends of those who pay you, or even to be friends of their friends. That, roughly speaking, is the conclusion of a study analyzing the impact of director relationships on the compensation of chief executive officers.
The study examined director connections as many as a dozen steps removed from each other among 22,074 directors at 3,114 companies across a broad spectrum of economic sectors. The sample is the largest ever examined for this purpose -- to analyze the structure and influence of social networks. Wharton accounting professors David F. Larcker, Scott A. Richardson and Irem Tuna, and Andrew J. Seary, an expert at the School of Communication of Simon Fraser University in Burnaby, Canada, conducted the research and co-authored a paper entitled, "Back Door Links between Directors and Executive Compensation."
The researchers call these links "the back door distance," defining that as "the minimum number of other company boards that is required to establish a connection between each pair of directors, ignoring the obvious link that occurs when directors are on the same board."
Thus the back door distance between Director Jack and Director Jill, both at Company A, would be deemed to be two in this scenari Jack is a director also at Company B and Jill is a director also at Company C, and they share a common link with Director Bob, who serves on the boards at Companies B and C. The computation resembles the game popularly known as six degrees of separation.
According to the researchers' calculations, CEOs who had any "back door" link to someone on the company's compensation committee received on average $453,688 more than CEOs who had no such links. The average compensation for CEOs at firms where inside and outside directors were linked in any way was greater by $612,422.
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