An Examination Of Director Compensation: The Roles Of Benchmarking And Asymmetry
Source: University of Nebraska
Using a panel of 237 Fortune 500 firms, the authors find evidence that firms utilize competitive benchmarking when determining director compensation. They document asymmetry in the relation between changes in compensation and changes in firm value, and show that this asymmetry is driven by the use of fixed-number equity compensation. They develop a formal model of director compensation in which directors provide decision making expertise and monitor the CEO, both requiring costly effort and increase firm value. The model suggests that an effective way for shareholders to induce both types of behavior is by offering an asymmetric contract that partially insulates director income in states where firm value is reduced.