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Performance-Based Incentives for Internal Monitors

42 Pages Posted: 16 Feb 2010 Last revised: 4 Apr 2012

Chris Armstrong

University of Pennsylvania - Accounting Department

Alan D. Jagolinzer

University of Cambridge Judge Business School

David F. Larcker

Stanford University - Graduate School of Business

Date Written: February 15, 2010

Abstract

This study examines the use of performance-based incentives for internal monitors (general counsel and chief internal auditor) and whether these incentives impair monitors’ independence by aligning their interests with the interests of those being monitored. We find evidence that incentives are greater when monitors’ job duties contribute more to the firm’s production function, when other top managers receive greater incentives, and when a firm has lower expected litigation risk. We also find evidence that firms provide more incentives when there is greater demand for internal monitoring. We find no evidence that internal monitor incentives impair the monitoring function. Instead, our results suggest that adverse firm outcomes (e.g., regulatory enforcement actions and internal-control material-weakness disclosures) occur less frequently at firms that provide greater monitor incentives.

Keywords: performance-based incentives, internal monitors, general counsel, accounting irregularities

JEL Classification: M46

Suggested Citation

Armstrong, Chris and Jagolinzer, Alan D. and Larcker, David F., Performance-Based Incentives for Internal Monitors (February 15, 2010). Rock Center for Corporate Governance at Stanford University Working Paper Series No. 76 ; Stanford University Graduate School of Business Research Paper No. 2052. Available at SSRN: https://ssrn.com/abstract=1553116 or http://dx.doi.org/10.2139/ssrn.1553116

Chris S. Armstrong

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Alan D. Jagolinzer

University of Cambridge Judge Business School ( email )

Trumpington Street
University of Cambridge
Cambridge, CB2 1AG
United Kingdom

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

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