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Asia Pacific Journal of Management

, Volume 35, Issue 4, pp 943–964 | Cite as

Incentive pay for non-executive directors: The direct and interaction effects on firm performance

  • Pattarin AdithipyangkulEmail author
  • T. Y. Leung
Article
  • 513 Downloads

Abstract

To improve corporate governance and firm performance, institutional investors and influential activists in the US recommend the use of incentive pay for non-executive directors. Policy makers in the UK and Australia, however, recommend against it. Motivated by stark contrast in the recommendations from these Anglo-Saxon countries, this paper investigates the impacts of incentive pay for non-executive directors on firm performance. The findings based on data from 178 listed Australian companies support both recommendations. Firm performance tends to be better when no incentive or high-power incentives are offered to non-executive directors than when low-power incentives are offered. This paper also investigates how incentive pay interacts with monitoring by large shareholders and debtholders to influence firm performance. This paper shows that large shareholder monitoring interacts negatively while debtholder monitoring interacts positively with incentive pay for non-executive directors to affect firm performance. Overall, the findings suggest that governance mechanisms recommended by agency theorists such as performance-contingent pay and monitoring can backfire if they are not designed properly. Both the direct and interaction effects should be considered when practitioners design corporate governance systems.

Keywords

Corporate governance Incentives Intrinsic motivation Monitoring Non-executive director compensation 

JEL classification

G34 Corporate Governance M52 Compensation 

Notes

Acknowledgements

The authors gratefully acknowledge financial support for this research from the School of Accounting, Curtin University of Technology.

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Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.Curtin University of TechnologyPerthAustralia
  2. 2.Open University of Hong KongKowloonHong Kong

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