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Abstract Concern over the continuing rise in executive compensation and lacklustre company performance has led to an increase in investor and board activity in corporate governance. Institutional investors are leading the new activity and changing the nature of the governance system in the United States. A model of the evolving governance system is presented and relevant characteristics of firm ownership structure and the CEO-board relationship are explored with regard to their impact on the pay-performance link. The results for ownership structure suggest that institutional investors do limit the payment of unearned compensation to the CEO, but that the presence of 5% equity owners has no significant impact. The results concerning the CEO-board relationship suggest that longer tenure as CEO leads to greater compensation, but neither the percentage of outside directors, the director retainer, nor the CEO's years of company service have a significant effect on compensation. Overall, the evidence supports the view that institutional investors are enhancing the accountability of CEOs. The evidence also supports the idea that boards would benefit more from gaining outside directors who are impartial rather than from simply increasing the number of outside directors.
Mangel et al. (Fri,) studied this question.