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Public thrift, private perks: signaling board independence with executive pay

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URI: https://hdl.handle.net/10016/34639
ISSN: 0022-1082
DOI: https://doi.org/10.1111/jofi.12989
UXXI: AR/0000028621
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public_JF_2021_ps.pdf (882.99 KB)
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2021-04-01
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Wiley
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We analyze how boards' reputational concerns influence executive compensation and the use of hidden pay. Independent boards reduce disclosed pay to signal their independence, but are more likely than manager-friendly boards to use hidden pay or to distort incentive contracts. Stronger reputational pressures lead to lower disclosed pay, weaker managerial incentives, and higher hidden pay, whereas greater transparency of executive compensation has the opposite effects. Although reputational concerns can induce boards to choose compensation contracts more favorable to shareholders, we show that there is a threshold beyond which stronger reputational concerns harm shareholders. Similarly, excessive pay transparency can harm shareholders.
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Ruiz Verdú, P., Singh, R. (2021). Public thrift, private perks: signaling board independence with executive pay. The Journal of Finance, 76 (2), pp. 845-891.
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