Average executive pay in the United States is positively correlated with firm performance and firm size, according to research by Professor Martin Conyon, published in the February 2014 issue of the Economic Journal. Generally, he concludes, this suggests that executives are rewarded for performance and the complexity of the organisations that they lead.


His study explores the impact of the 2010 Dodd-Frank Act, which has changed the corporate governance landscape for US firms. In particular, investors and stakeholders have much more information about the role of compensation consultants; and shareholders have the opportunity to vote on executive pay plans – so-called ''say on pay'', which gives them a non-binding mandatory vote on executive pay plans, similar to what UK shareholders have enjoyed for several years.


Among Professor Conyon''s findings:


· Compensation consultants are typically engaged by the board and not by management. This suggests an important degree of independence in the pay-setting process and arms-length pay-setting arrangements. This is generally good news for shareholders.


· Compensation committees are generally independent. There is little evidence that compensation committees have neglected to set pay contracts appropriately or resulted in ''too high'' pay for chief executives.


· When given the opportunity to vote on pay, shareholders typically endorse executive pay plans. Very few ''say on pay'' plans fail to pass.


· Executive pay contracts contain significant equity incentives, including both stock options and restricted stock. Equity compensation aligns the interests of senior managers with the firms'' owners. It also shows that on average chief executives have incentives to pursue shareholder value.


· Restricted stock as a vehicle for delivering long-term incentives has become increasingly important over time. But stock options remain an important part of executive compensation.


Professor Conyon notes that executive compensation remains controversial, and studies continue to investigate whether executive pay contracts are set optimally or whether chief executives are too powerful, resulting in pay outcomes that are not in the best interests of shareholders.


The challenge is to design appropriate empirical tests to evaluate the causal link between governance and executive compensation. A major obstacle in this regard is that many of the variables of interest (for example, board structure) are jointly determined (''endogenous'') and technical issues for identification of legitimate instruments for empirical strategies is difficult. Thus, isolating a causal connection between governance institutions and executive pay outcomes is, as yet, inconclusive.


From a practical standpoint, investors are legitimately worried that boards or compensation committees might be populated by non-independent directors. This is reflected in listing standards that require independent boards. But for the period investigated in this study (2007-12), affiliated boards do not seem to be the main driver of changes in executive compensation.


Professor Conyon concludes:


''The executive compensation debate is unlikely to dissipate. The Dodd-Frank Act requires even more compensation disclosure.


''And yet more studies on executive compensation are likely on the horizon – partly because information on the ratio of chief executive pay to worker pay will become available in the future!''


''Executive Compensation and Board Governance in US Firms'' by Martin Conyon is published in the February 2014 issue of the Economic Journal. Martin Conyon is a professor of corporate governance at Lancaster University.