Board Independence, Executive Pay Structures, and Pay Disclosure: Evidence from Europe
Using a broad sample of the largest European companies, I examine whether the two governance mechanisms, namely (i) independent monitoring by a board of directors and (ii) grants and disclosures of incentive-based executive pay, are substitutes for one another. I find that companies with proportionately more executives on their boards of directors grant greater incentive-based pay to their executives, and improve the transparency of their pay disclosure. The findings are consistent with the efficient contracting argument, which predicts that greater incentive-based pay and pay disclosure transparency mitigate agency problems generated by boards dependent upon management
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