A new study on Director influences on CEO compensation (full report) shed additional light on an issue that has been receiving a lot of press.

Here are a few exerpts summarizing their findings:

This paper explores how networks of directors affect CEO compensation. We map the entire network of all board members of S&P 1,500 firms between 1996-2004, and generate network measures that capture several dimensions of these connections. We present strong empirical evidence that firms that have more connected board members, and whose board members are connected to better connected firms award a higher compensation to their CEOs. Controlling for firm size, investment opportunities, industry, and performance, a CEO of a firm which is in the top quintile of connected firms receives a 10% higher salary and a 13% higher total compensation than a CEO of a firm which is in the bottom quintile of connected firms. These results are robust to alternative explanations such as interlocked boards, busy boards, and entrenched boards; they are also robust to the independence of the board, geographic location of the firm, different governance measures, and potentially unobserved CEO or firm characteristics. These results highlight the important role that board networks play in the decision to compensate a CEO. Outlandish goodies are showered upon CEOs simply because of a corporate version of the argument we all used when children: "But, Mom, all the other kids have one."

These results highlight the importance of understanding the intricate ways in which a board of directors makes decisions. We present evidence that the decision regarding CEO compensation is highly affected by a unique characteristic of the board - how central it is in the overall director network.

There are several theories as to why this difference exists. Some argue that this study is evidence of corporate back-scratching - or friends-of-friends networks, while others insist that it highlights a greater move towards self-serving practices. However Dale Oesterle, a law professor at Ohio State University, doesn't think it's that complicated. He believes that it is simply the fact that a board member with a reputation for supporting CEOs gets other jobs; an outside directors that is friendly to CEOs on one board gets selected by other CEOs for other board positions. Regardless, the study does further illustrate the many issues that must be addressed to fix the many problems associated with executive compensation in corporate America.