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How do firms adjust director compensation?

  • Farrell, Kathleen A.
  • Friesen, Geoffrey C.
  • Hersch, Philip L.
Registered author(s):

    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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    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
    Contact details of provider: 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.
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    12. 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, vol. 82(1), pages 197-225, October.
    13. 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.
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    15. 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.
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