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Performance-Based Incentives for Internal Monitors

Author

Listed:
  • Armstrong, Christopher S.

    (University of Pennsylvania)

  • Jagolinzer, Alan D.

    (Stanford University)

  • Larcker, David F.

    (Stanford University)

Abstract

This study examines the use of performance-based incentives for internal monitors (general counsel and chief internal auditor) and whether these incentives impair monitors' independence by aligning their interests with the interests of those being monitored. We find evidence that incentives are greater when monitors' job duties contribute more to the firm's production function, when other top managers receive greater incentives, and when a firm has lower expected litigation risk. We also find evidence that firms provide more incentives when there is greater demand for internal monitoring. We find no evidence that internal monitor incentives impair the monitoring function. Instead, our results suggest that adverse firm outcomes (e.g., regulatory enforcement actions and internal-control material-weakness disclosures) occur less frequently at firms that provide greater monitor incentives.

Suggested Citation

  • Armstrong, Christopher S. & Jagolinzer, Alan D. & Larcker, David F., 2010. "Performance-Based Incentives for Internal Monitors," Research Papers 2052, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:2052
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    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP2052.pdf
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    Cited by:

    1. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    2. Friedman, Henry L., 2014. "Implications of power: When the CEO can pressure the CFO to bias reports," Journal of Accounting and Economics, Elsevier, vol. 58(1), pages 117-141.

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