Corporate governance progress and the pay premium of owner CEOs: Evidence from Israel

Research Question/Issue Can progress in corporate governance trim the pay premium of owner CEOs (CEOs that are members of the control group) over professional non-owner CEOs? Research Findings/Insights We examine CEO pay in 201 concentrated-ownership companies traded on the Tel Aviv Stock Exchange during 2008-2015 and compare it to earlier evidence from 1994 to 2001. We find that following the significant advance in Israeli corporate governance since the beginning of the 21st century, including some specific CEO pay regulation, the owner CEO pay premium dropped by almost three-quarters, primarily in partnership-controlled firms (firms controlled by a coalition of business partners). Theoretical/Academic Implications In some concentrated ownership firms controlling shareholders extract private benefits by appointing themselves as CEOs and receiving an excessive owner CEO pay. The problem of owner CEO pay premium appears much milder in partnership-controlled relative to family-controlled firms, perhaps due to the more cohesive nature of the family control group. Practitioner/Policy Implications Measures such as establishing an independent compensation committee on the board and, more directly, requiring a periodic (say, once every 3 years) approval of owner CEO pay by a majority of the minority shareholders vote are effective in cutting owner CEOs' excess pay.