Research Summary
Research Summary
Board Independence and the Design of Executive Compensation
Description
In this project, I analyze the compensation
decisions of boards of directors. Compensation decisions not only serve to motivate executives, but also
affect a board's reputation for independence. Although greater managerial influence over
the board has the obvious effect of increasing the level of pay, there is a more
subtle relationship between extent of this influence and the composition of pay.
The theory predicts that it is not the most captured boards that are prone to choose
inefficient pay-for-performance sensitivities and transfer rents in opaque ways as
commonly argued. Rather, reputational concerns may cause comparatively independent boards
to place excessive weight on investor perception at the expense of efficiency, resulting
in pay packages that, for example, provide excessive incentives. By making the decisions
of boards extremely visible, mandatory disclosure of executive compensation lowers the
level of pay at the expense of distortions in the structure.