Independent versus non-independent outside directors in European companies: who has a say on CEO compensation?

Our study reveals how two separate dimensions of board composition-the proportion of independent directors and of non-independent directors-influence CEO compensation in Western European firms. Controlling for the simultaneous determination of CEO pay structure and board design, we find that firms with a higher proportion of non-independent outsiders on their boards pay less direct compensation (salary + bonus) and less equity-linked compensation to their CEOs. By contrast, CEOs working for firms with more independent boards receive more equity based-pay. When we control for the fact that equity linked is not granted systematically in Europe we find that firms with more independent directors on the board tend to grant equity linked compensation more often than firms with more non independent outside directors. Our results challenge the commonly accepted view of independent directors as safeguards of shareholder
value, uncovering the relevance of non-independent outsiders for pay moderation and incentives.