Quantifying corporate governance: Executive employee compensation and independence of directors as a measure of the quality of corporate governance

This paper considers the subject of corporate governance observed through the prism of the relationship between executive compensation relative to their performance and interaction with the Board of Directors. The corporations researched belong to the special Information and Communication Technology (ICT) classification by the North American Industry Classification System.;The review of literature investigates legal and conceptual aspects of American corporations. Starting with the agency problem, the complexities of paying executives for their performance rather than their stature are examined. The question that CEOs and the Board of Directors bargain at arm's length when setting the CEOs compensation is challenged. Independence of directors, interlocked and interconnected boards, and entrenched boards structures are shown to likely give the CEO more bargaining power than the board, which increases their relative compensation as compared to an optimal arm's length bargaining process.;Recent compensation figures are presented to illustrate the recent public outrage over seemingly excessive CEO compensation. Modalities of hiding considerable amounts of compensation from the public eye are analyzed, followed by the different modalities of constructing compensation contract to motivate CEOs to perform in the interest of the corporation.;The body of research consists of multiple regression analysis relating four common measures of corporate return to CEO compensation as dependent variable. There are two research hypotheses stated: (1) excessive CEO pay results in poor corporate performance; and (2) weak boards result in higher CEO pay. The research finds that CEO pay variation has the strongest dependency on market capitalization, followed far behind by a firm's Return on Equity and Return on Assets. A much stronger positive relationship between Return on Equity and CEO pay is found when firms experience positive Return on Equity. The other measure of corporate return, Total Return to Shareholders, is found to have a mostly insignificant influence over compensation. The research also finds that CEOs who are also Chairman of the Board are not likely to receive higher compensation unless the firm experiences positive Return on Equities. A measure of 'excessive' CEO pay is recommended for future research using this paper's findings.