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Board of discord: Conflicting preferences and performance pay

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  • Steven Schmeiser

Abstract

This study examines the interaction of conflicting preferences among directors, performance pay, and group effort. I model a corporate board in which directors voluntarily choose to research (or not research) an investment decision made by the board on behalf of the firm. Free-riding among directors creates a need for performance pay to motivate this costly research. The study shows that board diversity, modeled as heterogeneous personal preferences among directors over the chosen investment, can act as a substitute for costly performance pay and, in equilibrium, benefit the firm. This creates a direct financial incentive for firms to increase board diversity. The study then shows how the optimal level of diversity changes with board and firm characteristics and generates a set of testable empirical predictions.

Suggested Citation

  • Steven Schmeiser, 2023. "Board of discord: Conflicting preferences and performance pay," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2279871-227, October.
    • Handle: RePEc:taf:oaefxx:v:11:y:2023:i:2:p:2279871
    DOI: 10.1080/23322039.2023.2279871
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