Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Published in:
Where Are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance Read chapter Read first chapter

2012 | OriginalPaper | Chapter

Pay More Stocks and Options to Directors? Theory and Evidence of Board Compensation

Author : Gang Nathan Dong

Published in: Corporate Governance

Publisher: Springer Berlin Heidelberg

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

The compensation of board directors has received much attention, along with the growing debates on corporate governance in recent years, partly due to the ongoing financial crisis. While prior studies including Hall and Liebman (1998) have shown evidence of a dramatic increase in the use of equity-based incentives, resulting in an increase in the sensitivity of executive pay to firm performance, we ask whether it benefits shareholders to offer similar incentive contracts to board directors. This paper suggests that equity-based compensation for board directors is necessary and the level of incentives depends on directors’ effectiveness in monitoring and friendliness in advising CEOs. Using the market competition and pay correlation to proxy for monitoring effectiveness and advisory friendliness, we report empirical evidence supporting our hypotheses.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
previous chapter Executive Debt-Like Compensation
next chapter Directors in Banks: Compensation and Characteristics
Appendix
Available only for authorised users
Footnotes
1
It is similar to the debt renegotiation problem with many creditors as analyzed in Bolton and Scharfstein (1996) using an optimal contracting framework.
 
2
This implies that the control variables and firm fixed effects used in their regressions cannot fully capture the real firm characteristics.
 
3
The excessive pays of board directors and CEOs are similar to Brick et al. (2006).
 
4
Competition in banking industry should drive down the incentive pays for directors due to the external monitoring and disciplining by the competitive market. But what we observed is the rising incentive pays for bank directors. This might be due to the global war for financial talents (Chambers et al. 1998) and the rise of hedge funds (Kostovetsky 2009).
 
5
In some European Union and Asian countries, there are two separate boards: an executive board, also called corporate executive team, for day-to-day business and a supervisory board, also called board of directors (elected by the shareholders) for supervising the executive board. To simply the analysis, this paper considers the boards of directors as a single entity.
 
6
The ExecuComp database reports detailed information of director compensation from 2006 onwards.
 
7
Harris and Raviv (2008) studies the optimal condition for inside versus outside directors to control the board, and show that shareholders can sometimes be better off with an insider-controlled board.
 
8
The extant literature on product market competition, strategic alliances and joint ventures generally uses SIC codes to assess whether two companies are competitors. The approach used in the existing literature (e.g., Grullon et al. 2006) treats two companies as competitors if they have the same 4-digit SIC code. Masulis and Nahata (2009) discuss the pros and cons of this approach.
 
9
The higher the HHI, the lower the competition, and vice versa.
 
10
It is consistent with the arguments of Herman (1981), Whisler (1984) and Mace (1986) that individual board members are reluctant to step forward and oppose management, because management’s power to select and eject board members affects the behavior of the board. Therefore, the more friendly a director to the CEO the more likely his advice is accepted by the CEO.
 
Literature
Adams, R., & Ferreira, D. (2007). A theory of friendly boards. Journal of Finance, 62, 217–250.CrossRef
Adams, R., & Ferreira, D. (2008). Do directors perform for pay? Journal of Accounting and Economics, 46, 154–71.CrossRef
Adams, R., Hermalin, B., & Weibach, M. (2010). The role of boards of directors in corporate governance: a conceptual framework and survey. Journal of Economic Literature, 48, 58–107.CrossRef
Angrist, J., & Krueger, A. (1999). Empirical Strategies in Labor Economics. Handbook of Labor Economics (Orley Ashenfelter and David Card, eds.) 3A, 1277–1366.
Blair, M. (1995). Ownership and control: Rethinking corporate governance for the twenty-first century. Washington, DC: Brookings Institution Press.
Bolton, P., & Scharfstein, D. (1996). Optimal debt structure and the number of creditors. Journal of Political Economy, 104, 1–25.CrossRef
Boyd, B. (1996). Determinants of U.S. outsider director compensation. Corporate Governance: An International Review, 4, 202–211.CrossRef
Brick, I., Palmon, O., & Wald, J. (2006). CEO compensation, director compensation, and firm performance: evidence of cronyism? Journal of Corporate Finance, 12, 403–423.CrossRef
Bryan, S., & Klein, A. (2004). Non-management director options, board characteristics, and future firm investments and performance. NYU Working Paper No. 04–009.
Chambers, E., Foulon, M., Handfield-Jones, H., Hankin, S., & Michaels, E. (1998). The war for talent. McKinsey Quarterly, 3, 44.
Dixon, W. (1960). Simplified estimation from censored normal samples. Annals of Mathematical Statistics, 31, 385–391.CrossRef
Dong, G. (2012). Pay more stocks to directors: Theory of corporate governance and board’s compensation. Rutgers University Working Paper.
Economist. (2001). A survey by PWC of British boards. The Economist Newspaper, February 10, 68.
Farrell, K., Friesen, G., & Hersch, P. (2008). How do firms adjust director compensation? Journal of Corporate Finance, 14, 153–162.CrossRef
Fich, E., & Shivdasani, A. (2005). The impact of stock-option compensation for outside directors on firm value. Journal of Business, 78, 2229–2254.CrossRef
Gao, H. (2010). Optimal compensation contracts when managers can hedge. Journal of Financial Economics, 97, 218–238.CrossRef
Gerhart, B., & Milkovich, G. (1990). Organizational differences in managerial compensation and financial performance. Academy of Management Journal, 33, 663–691.CrossRef
Grullon, G., Kanatas, G., & Kumar, P. (2006). The impact of capital structure on advertising competition: An empirical study. Journal of Business, 79, 3101–3124.CrossRef
Guercio, D., Seery, L., & Woidtke, T. (2008). Do boards pay attention when institutional investor activists just vote no. Journal of Financial Economics, 90, 84–103.CrossRef
Hall, B., & Liebman, J. (1998). Are CEOs really paid like bureaucrats? Quarterly Journal of Economics., 103, 653–691.CrossRef
Harris, M., & Raviv, A. (1978). Some results on incentive contracts with applications to education, insurance, and law enforcement. American Economic Review, 68, 20–30.
Harris, M., & Raviv, A. (2008). A theory of board control and size. Review of Financial Studies, 21, 1797–1832.CrossRef
Hasings, C., Mosteller, F., Tukey, J., & Winsor, C. (1947). Low moments for small samples: A comparative study of order statistics. Annals of Mathematical Statistics, 18, 413–426.CrossRef
Hempel, P., & Fay, C. (1994). Outside director compensation and firm performance. Human Resource Management, 33, 111–133.CrossRef
Hermalin, B., & Weisbach, M. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88, 96–118.
Hermalin, B., & Weisbach, M. (2003). Boards of directors as an endogenously determined institution: A survey of the economic literature. Economic Policy Review, 9, 7–26.
Herman, E. (1981). Corporate control, corporate power. New York: Cambridge University Press.
Holmstrom, B. (1979). Moral hazard and observability. Bell Journal of Economics, 10, 74–91.CrossRef
Holmstrom, B., & Milgrom, P. (1987). Aggregation and linearity in the provision of intertemporal incentives. Econometrica, 55, 303–328.CrossRef
Jensen, M., & Meckling, W. (1976). The theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.CrossRef
Kostovetsky, L. (2009). Human capital flows and the financial industry. University of Rochester Working Paper.
Kumar, P., & Sivaramakrishnan, K. (2008). Who monitors the monitor? The effect of board independence on executive compensation and firm value. Review of Financial Studies, 21, 1371–1401.CrossRef
Leonard, J. (1990). Executive pay and firm performance. Industrial and Labor Relations Review, 43, 13–29.CrossRef
Linn, S., & Park, D. (2005). Outside director compensation policy and the investment opportunity set. Journal of Corporate Finance, 11, 680–715.CrossRef
Lorsch, J. (1989). Pawns or potentates. Cambridge: Harvard Business School Press.
Mace, M. (1986). Directors, myth and reality. Cambridge: Harvard Business School Press.
Masulis, R., & Nahata, R. (2009). Financial contracting with strategic investors: evidence from corporate venture capital backed IPOs. Journal of Financial Intermediation, 18, 599–631.CrossRef
Meyer, B. (1995). Natural and Quasi-experiments in Economics. Journal of Business and Economic Statistics, 13, 151–161.
Randøy, T., & Jenssen, J. (2004). Board independence and product market competition in Swedish firms. Corporate Governance: An International Review, 12, 281–289.CrossRef
Ryan, H., & Wiggins, R. (2004). Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73, 497–524.CrossRef
Shadish, W., Cook, T., & Campbell, D. (2001). Experimental and quasi-experimental designs for generalized causal inference. Wadsworth Publishing. Cengage Learning, New York, USA.
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52, 737–783.CrossRef
Song, F., & Thakor, A. (2006). Information control, career concerns, and corporate governance. Journal of Finance, 61, 1845–1896.CrossRef
Tirole, J. (1986). Hierarchies and bureaucracies, on the role of collusion in organization. Journal of Law, Economics and Organization, 61, 1845–1896.
Tirole, J. (1992). Collusion and the theory of organization, advances in economic theory. Advances in economic theory: sixth world congress. Cambridge University Press. Cambridge, UK.
Tufano, P., & Sevick, M. (1997). Board structure and fee-setting in the U.S. mutual fund industry. Journal of Financial Economics, 46, 321–355.CrossRef
Vafeas, N. (1999). Determinants of the adoption of director incentive plans. Journal of Accounting, Auditing and Finance, 14, 453–474.
Warther, V. (1998). Board effectiveness and board dissent: a model of the board’s relationship to management and shareholders. Journal of Corporate Finance, 4, 53–70.CrossRef
Whisler, T. (1984). The rules of the game. Homewood: Dow Jones-Irwin.
Yermack, D. (2004). Remuneration, retention and reputation incentives for outside directors. Journal of Finance, 59, 2281–2308.CrossRef
Metadata
Title
Pay More Stocks and Options to Directors? Theory and Evidence of Board Compensation
Author
Gang Nathan Dong
Copyright Year
2012
Publisher
Springer Berlin Heidelberg
Book
Corporate Governance

Print ISBN: 978-3-642-31578-7

Electronic ISBN: 978-3-642-31579-4

Copyright Year: 2012

DOI
https://doi.org/10.1007/978-3-642-31579-4_7