Publication: Board reputation, CEO pay, camouflaged compensation
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2011-03-08
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Social Science Research Network
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Abstract
Reputational concerns are arguably the single most powerful incentive for board directors to act
in the interest of shareholders. We propose a model to investigate the impact of boards' reputational
concerns on the level and structure of executive compensation, the use of camou
aged pay, and the
relation between board independence and compensation decisions. We show that, in order to be
perceived as independent, boards lower managers' pay, but may also pay managers in hidden ways
or structure compensation ine ciently. Interestingly, independent boards, not manager-friendly
boards, are more likely to make use of hidden compensation. We apply our model to study the
costs and bene ts of greater pay transparency and of measures, such as say-on-pay initiatives, that
increase boards' accountability to shareholders.
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Keywords
Executive compensation, Board of directors, Hidden pay, Board reputation, Board independence