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Pay More Stocks and Options to Directors? Theory and Evidence of Board Compensation

In: Corporate Governance

Author

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  • Gang Nathan Dong

    (Columbia University)

Abstract

The compensation of board directors has received much attention, along with the growing debates on corporate governance in recent years, partly due to the ongoing financial crisis. While prior studies including Hall and Liebman (1998) have shown evidence of a dramatic increase in the use of equity-based incentives, resulting in an increase in the sensitivity of executive pay to firm performance, we ask whether it benefits shareholders to offer similar incentive contracts to board directors. This paper suggests that equity-based compensation for board directors is necessary and the level of incentives depends on directors’ effectiveness in monitoring and friendliness in advising CEOs. Using the market competition and pay correlation to proxy for monitoring effectiveness and advisory friendliness, we report empirical evidence supporting our hypotheses.

Suggested Citation

  • Gang Nathan Dong, 2012. "Pay More Stocks and Options to Directors? Theory and Evidence of Board Compensation," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 157-179, Springer.
    • Handle: RePEc:spr:sprchp:978-3-642-31579-4_7
    DOI: 10.1007/978-3-642-31579-4_7
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