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Remuneration, Retention, and Reputation Incentives for Outside Directors

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DAVID YERMACK

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Abstract

I study incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Previous research has only shown these relations to apply under limited circumstances such as financial distress. Together these incentive mechanisms provide directors with wealth increases of approximately 11 cents per $1,000 rise in firm value. Although smaller than the performance sensitivities of CEOs, outside directors' incentives imply a change in wealth of about $285,000 for a 1 standard deviation ("SD") change in typical firm performance. Cross-sectional patterns of director equity awards conform to agency and financial theories. Copyright 2004 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 5 (October)
Pages: 2281-2308
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Handle: RePEc:bla:jfinan:v:59:y:2004:i:5:p:2281-2308

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  1. Renée Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2008. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," NBER Working Papers 14486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Fahlenbrach, Rudiger & Low, Angie & Stulz, Rene, 2008. "Why Do Firms Appoint CEOs as Outside Directors?," Working Paper Series 2008-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  3. Hristos Doucouliagos & Saeed Askary & Janto Haman, 2006. "Directors' Remuneration and Performance in Australian Banking," Economics Series 2006_11, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance. [Downloadable!]
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  4. Enrichetta Ravina & Paola Sapienza, 2006. "What Do Independent Directors Know? Evidence from Their Trading," NBER Working Papers 12765, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Sharad Asthana & Steven Balsam, . "Determinants Of Outside Director Turnover," Working Papers 0023, College of Business, University of Texas at San Antonio. [Downloadable!]
  6. Adams, Renée B. & Ferreira, Daniel, 2005. "Do Directors Perform for Pay?," CEI Working Paper Series 2005-2, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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