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Cash versus incentive compensation: Lawsuits and director pay

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  • Crutchley, Claire E.
  • Minnick, Kristina
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    Abstract

    The role of the board of directors is to oversee managerial decisions and to protect the interests of shareholders. While director pay historically is a small cash fee, many corporations now use both stock and option grants as a part of a director's compensation. This paper examines whether this incentive pay aligns the interests of directors with those of the shareholders. We study the special case of shareholder lawsuits that specifically name the board of directors. These lawsuits indicate a breakdown in the trust and therefore the relationship between shareholders and directors. We find that when directors are paid with high incentive pay (designed to align their interests with shareholders) there is a greater incidence of lawsuits. Interestingly, greater cash compensation actually reduces the likelihood of a lawsuit.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148296311001500
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Business Research.

    Volume (Year): 65 (2012)
    Issue (Month): 7 ()
    Pages: 907-913

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    Handle: RePEc:eee:jbrese:v:65:y:2012:i:7:p:907-913

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

    Related research

    Keywords: Lawsuits; Compensation; Corporate governance; Options;

    References

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    16. Denis, David J. & Hanouna, Paul & Sarin, Atulya, 2006. "Is there a dark side to incentive compensation?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 467-488, June.
    17. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
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    Cited by:
    1. Cheng-Feng Cheng, 2012. "Evaluate the Effectiveness of Manager Compensation," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 25-44, June.

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