Performance-Based Incentives for Internal Monitors
42 Pages Posted: 16 Feb 2010 Last revised: 4 Apr 2012
Date Written: February 15, 2010
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: Suggested Citation