Why is there a director-specific component in CEO pay after SOX? *

This study presents new evidence that, following the enactment of the Sarbanes-Oxley Act of 2002 (SOX), there is a statistically and economically significant director-specific component in CEO pay: in the cross-section of firms, directors that award relatively higher (lower) CEO pay in one firm also award relatively higher (lower) CEO pay in other firms of whose boards they are members. The directorspecific component in CEO pay has a significant effect on the changes in CEO pay and on the composition of CEO pay, thus affecting CEO incentives. Our findings are based on models that take into account firm, CEO, and board characteristics, year-industry effects, firm fixed effects, and the endogenous assignment of directors to firms. We do not find evidence that the director-specific component in CEO pay is due to the changes in board composition following SOX. Instead, we find some evidence that the director-specific effect in CEO pay is due to changes in director behavior related to the additional risks imposed on directors after SOX.