Yuval Millo, London School of Economics

Paid for connections or too connected to be good? Social Networks and Executive vs. Non-Executive Directors Compensation Joanne Horton*, Yuval Millo¤ and George Serafeim Initial draft – please do not circulate or quote ABSTRACT We construct a social network that comprises of 4,279 UK firms and 24,685 directors and find that measures, reflecting the centrality and dyadic constraint of the directors within their network of interlocking directorship ties, exhibit significant association with directors’ pay, after controlling for other economic determinants of compensation. Chief and other senior executive directors with higher centrality and lower dyadic constraint earn higher compensation. In contrast, Chairmen and other non-executive directors with larger networks and lower dyadic constraint earn lower compensation. At this initial stage we hypothesize that the difference between the correlations is related to the different roles that the different directors are expected to fill and for which they are compensated. Executive directors are rewarded for the resources they bring to a firm, through their networks, while non-executive directors that are less socially connected earn higher compensation since their relative isolation is perceived as an indication for their independence and superior monitoring capabilities. We also find that the predicted component of compensation, arising from these social characteristics, has a statistically significant association with future stock market performance and valuation.