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How do firms adjust director compensation?

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  • Farrell, Kathleen A.
  • Friesen, Geoffrey C.
  • Hersch, Philip L.
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    Abstract

    This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998-2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 14 (2008)
    Issue (Month): 2 (April)
    Pages: 153-162

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    Handle: RePEc:eee:corfin:v:14:y:2008:i:2:p:153-162

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    Web page: http://www.elsevier.com/locate/jcorpfin

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    1. David A. Becher & Terry L. Campbell II & Melissa B. Frye, 2005. "Incentive Compensation for Bank Directors: The Impact of Deregulation," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1753-1778, September.
    2. Linn, Scott C. & Park, Daniel, 2005. "Outside director compensation policy and the investment opportunity set," Journal of Corporate Finance, Elsevier, Elsevier, vol. 11(4), pages 680-715, September.
    3. Core, John E. & Larcker, David F., 2002. "Performance consequences of mandatory increases in executive stock ownership," Journal of Financial Economics, Elsevier, Elsevier, vol. 64(3), pages 317-340, June.
    4. Eliezer M. Fich & Anil Shivdasani, 2005. "The Impact of Stock-Option Compensation for Outside Directors on Firm Value," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2229-2254, November.
    5. Agrawal, Anup & Walkling, Ralph A, 1994. " Executive Careers and Compensation Surrounding Takeover Bids," Journal of Finance, American Finance Association, vol. 49(3), pages 985-1014, July.
    6. Baysinger, Barry D & Zardkoohi, Asghar, 1986. "Technology, Residual Claimants, and Corporate Control," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 2(2), pages 339-49, Fall.
    7. David Yermack, 2004. "Remuneration, Retention, and Reputation Incentives for Outside Directors," Journal of Finance, American Finance Association, vol. 59(5), pages 2281-2308, October.
    8. Stephen F. O'Byrne, 1995. "Total Compensation Strategy," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(2), pages 77-86.
    9. Ryan, Harley Jr. & Wiggins, Roy III, 2004. "Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(3), pages 497-524, September.
    10. Lucian A. Bebchuk & Yaniv Grinstein & Urs Peyer, 2006. "Lucky Directors," NBER Working Papers 12811, National Bureau of Economic Research, Inc.
    11. Mason Gerety & Chun-Keung Hoi & Ashok Robin, 2001. "Do Shareholders Benefit from the Adoption of Incentive Pay for Directors?," Financial Management, Financial Management Association, Financial Management Association, vol. 30(4), Winter.
    12. Brian J. Hall, 1999. "The Design Of Multi-Year Stock Option Plans," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(2), pages 97-106.
    13. Heron, Randall A. & Lie, Erik, 2007. "Does backdating explain the stock price pattern around executive stock option grants?," Journal of Financial Economics, Elsevier, Elsevier, vol. 83(2), pages 271-295, February.
    14. Hayes, Rachel M. & Schaefer, Scott, 1999. "How much are differences in managerial ability worth?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 27(2), pages 125-148, April.
    15. Garvey, Gerald T. & Milbourn, Todd T., 2006. "Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad," Journal of Financial Economics, Elsevier, Elsevier, vol. 82(1), pages 197-225, October.
    16. Brick, Ivan E. & Palmon, Oded & Wald, John K., 2006. "CEO compensation, director compensation, and firm performance: Evidence of cronyism?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 12(3), pages 403-423, June.
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    Cited by:
    1. Engel, Ellen & Hayes, Rachel M. & Wang, Xue, 2010. "Audit committee compensation and the demand for monitoring of the financial reporting process," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 49(1-2), pages 136-154, February.
    2. Chen, Ming-Yuan, 2010. "Managerial pay adjustments: Decomposition and impact on firm productive efficiency," Economic Modelling, Elsevier, vol. 27(1), pages 196-207, January.
    3. Dong Chen, 2014. "The Non-monotonic Effect of Board Independence on Credit Ratings," Journal of Financial Services Research, Springer, vol. 45(2), pages 145-171, April.
    4. Cardinaels, Eddy, 2009. "Governance in non-for-profit hospitals: Effects of board members' remuneration and expertise on CEO compensation," Health Policy, Elsevier, vol. 93(1), pages 64-75, November.
    5. Sharma, Vineeta, 2011. "Independent directors and the propensity to pay dividends," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(4), pages 1001-1015, September.
    6. Shin-Rong Shiah-Hou & Chin-Wei Cheng, 2012. "Outside director experience, compensation, and performance," Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 38(10), pages 914-938, October.

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