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

Chapter

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.

Notes

Acknowledgement

I am grateful to conference participants at SEA (Atlanta), SWFA (San Antonio) and WEA (San Diego). I thank Frederick Bereskin, Ivan Brick, Simi Kedia, Yigitcan Karabulut, Jin-Mo Kim, Peter Klein, Tom Nohel, Darius Palia, Abraham Ravid, Nitish Sinha and Tim Zhou for helpful comments. I acknowledge the research financial support from Rutgers University Graduate School and Rutgers Business School. All errors and omissions remain my own.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  1. 1.Department of Health Policy and ManagementColumbia UniversityNew YorkUSA

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