The aftermath of the financial crisis of 2008 sparked an intense debate over executive compensation. A widely-held view among politicians, regulators, and the public is that CEOs extract high compensation through lax corporate governance practices, pointing to the need for strengthening corporate governance practices. A large empirical literature attempts to establish the causal effect of corporate governance on CEO pay, but the evidence is mixed. The mixed evidence is likely due to endogenous nature of both corporate governance and CEO pay as these variables are known to be correlated with many observable and unobservable industry, firm, CEO and board characteristics.
We make use of corporate governance reforms implemented in many countries around the world since early 2000’s and investigate their effects on CEO compensation. We focus on the CEO pay difference between public and private firms and investigate how a country’s exogenous corporate governance reform affects the difference in CEO compensations between public and private firms (ie pay premium). Utilising difference-in-differences technique with corporate governance reforms as exogenous events and private firms as benchmarks, our experiment provides an ideal setting to investigate the causal effect of governance strength on CEO pay.