Multidimensional Corporate Governance: The Joint Design of Board Structure and Executive Compensation

This paper provides a theoretical framework for studying the joint design of board structure and executive compensation. The conventional view is that as a board monitors more intensely, there is less of a need for high-powered equity incentives. However, to monitor effectively, the board also requires more information from the CEO, and without proper incentives, the CEO may not disclose the information. We formalize this intuition and show that CEO equity incentives are determined jointly with board monitoring and advising. In equilibrium, board advising intensity and equity compensation are negatively (positively) related when the board has high (low) monitoring skill. Further, equity incentives may be positively or negatively related to board monitoring intensity, depending on the nature of board advice. Our analysis sheds light on the observed correlations between board structure and executive compensation and offers new testable predictions about how these ubiquitous governance instruments cluster together.

Keywords: Board monitoring, board advising, equity incentives, corporate governance, disclosure

JEL Classification: G30, G34, D83

Suggested Citation: Suggested Citation

Chen, Kevin and Guay, Wayne R. and Lambert, Richard, Multidimensional Corporate Governance: The Joint Design of Board Structure and Executive Compensation (May 15, 2024). Available at SSRN: https://ssrn.com/abstract=3584848 or http://dx.doi.org/10.2139/ssrn.3584848