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How do firms adjust director compensation?

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

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.

Suggested Citation

  • Farrell, Kathleen A. & Friesen, Geoffrey C. & Hersch, Philip L., 2008. "How do firms adjust director compensation?," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 153-162, April.
  • Handle: RePEc:eee:corfin:v:14:y:2008:i:2:p:153-162
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    1. repec:eee:corfin:v:45:y:2017:i:c:p:566-585 is not listed on IDEAS
    2. Martin Bugeja & Stephanie Fohn & Zoltan Matolcsy & Neil Fargher, 2016. "Determinants of the levels and changes in non-executive director compensation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 627-667, September.
    3. Ming-Yuan Chen, 2010. "The Components Of Managerial Pay Adjustments And Their Impact On Firm Performance," Manchester School, University of Manchester, vol. 78(6), pages 582-608, December.
    4. 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, vol. 49(1-2), pages 136-154, February.
    5. Sharma, Vineeta, 2011. "Independent directors and the propensity to pay dividends," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1001-1015, September.
    6. Mahroo Irani & Mahroo Irani & Mehdi Safari Gerayeli, 2017. "Relationship between Corporate Governance and CEO Compensation among Listed Firms in Tehran Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 285-292.
    7. 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.
    8. Mallin, Chris & Melis, Andrea & Gaia, Silvia, 2015. "The remuneration of independent directors in the UK and Italy: An empirical analysis based on agency theory," International Business Review, Elsevier, vol. 24(2), pages 175-186.
    9. Lars Oxelheim & Kevin Clarkson, 2015. "Cronyism and the Determinants of Chairman Compensation," Journal of Business Ethics, Springer, vol. 131(1), pages 69-87, September.
    10. Chen, Ming-Yuan, 2010. "Managerial pay adjustments: Decomposition and impact on firm productive efficiency," Economic Modelling, Elsevier, vol. 27(1), pages 196-207, January.
    11. Shin-Rong Shiah-Hou & Chin-Wei Cheng, 2012. "Outside director experience, compensation, and performance," Managerial Finance, Emerald Group Publishing, vol. 38(10), pages 914-938, August.
    12. Dong Chen, 2014. "The Non-monotonic Effect of Board Independence on Credit Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(2), pages 145-171, April.
    13. Chang, Millicent & Watson, Iain, 2015. "Delayed disclosure of insider trades: Incentives for and indicators of future performance?," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 182-197.
    14. Hüttenbrink, Alexander & Oehmichen, Jana & Rapp, Marc Steffen & Wolff, Michael, 2014. "Pay-for-performance – Does one size fit all? A multi-country study of Europe and the United States," International Business Review, Elsevier, vol. 23(6), pages 1179-1192.

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