When much is not better? Top management compensation, board structure, and performance in Spanish firms

Previous empirical results reveal several contradictions when relating top management compensation, board structure and levels of performance. While fewer directors and more external directors are associated with better supervision, there is no agreement on the effect on top management compensation level. This lack of consensus is even more noticeable when analyzing the effect performance. This paper offers a theoretical framework and a panel data methodology based empirical study to account for how earlier analyses have differed. Given the large board dimension in the Spanish market, information processing perspectives are confirmed which positively link board size with higher top management compensation. Similarly, a higher proportion of external directors reduces top management compensation levels since it improves supervision and reduces insiders' power. Finally, a quadratic relation is obtained between performance and top management compensation. This relation explains a positive effect, supported by agency theory on performance at low levels of management compensation, and a negative effect which is consequence of higher managers' discretion at high levels.