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COMPENSATION IN CONTEXT

ISS ANALYSIS FINDS CHOICE OF BOARD LEADERSHIP STRUCTURE MAY IMPACT CEO PAY LEVELS

March 21, 2016

The average annual compensation for chief executive officers of large U.S. corporations varies significantly depending on board leadership structure, according to a report released today by Institutional Shareholder Services.

An ISS analysis of S&P 500 companies finds compensation over a three year period was 42 percent higher on average for CEOs that had an insider chairman (excluding those in a combined role), than for CEOs of companies chaired by an independent outsider. CEOs who also held the post of board chair were the next highest group, receiving 29 percent more in average annual compensation compared to CEOs of companies chaired by an independent outsider. Average CEO pay was also sensitive to company revenue, but regressions showed no significant association with other potential explanatory factors, such as indexed shareholder return performance or CEO tenure.

While the number of U.S. companies that combine the top two titles has declined in recent years, the dual role is still the most prevalent leadership structure among S&P 500 companies, according to ISS QuickScore data. For 2015, approximately 51 percent of S&P 500 companies combined the chair and CEO roles, down from approximately 54 percent in 2014.

The fact that, on average, a CEO's pay is generally higher when that post is held in conjunction with the board chair role or when there is an insider chairman provides some support of views that insiders are not the best monitors of shareholder interests in the board room, at least as measured by CEO pay.

“While many studies have examined the impact of financial, economic, and operational measures on CEO pay, the effect of board leadership structures has to date not been a significant part of the body of analysis,” said Carol Bowie, ISS’ head of Americas research. “These findings suggest that companies with a greater level of independent oversight are able to provide a more effective check on CEO compensation.”

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