Incentive Compensation for Outside Directors and CEO Turnover

36 Pages Posted: 24 Jul 2000

See all articles by Tod Perry

Tod Perry

Indiana University - Kelley School of Business - Department of Finance

Date Written: June 2000

Abstract

As monitors of management, independent outside directors play an important oversight and monitoring role in corporate governance. By providing directors with a financial stake in the performance of the firm through incentive-based compensation, firms can align the interests of directors and shareholders. In this paper, I examine whether the structure of director compensation affects CEO turnover, a specific corporate event where directors play a crucial role. I document a substantial increase in the use of incentive-based compensation for directors. I also find that incentive compensation for directors influences the level of monitoring by the board. When directors of independent boards receive incentive compensation, the like lihood of CEO turnover following poor performance increases. I also find that the likelihood of a firm adopting a stock-based incentive plan for directors is positively related to the fraction of independent directors on the board and institutional ownership of the firm, which is consistent with firms adopting option and stock plans for directors to provide financial incentives for directors to monitor management.

Keywords: Board of Directors, Director Compensation, CEO turnover

JEL Classification: G30, G34

Suggested Citation

Perry, Tod, Incentive Compensation for Outside Directors and CEO Turnover (June 2000). Presented at Tuck-JFE Contemporary Corporate Governance Conference. Available at SSRN: https://ssrn.com/abstract=236033 or http://dx.doi.org/10.2139/ssrn.236033

Tod Perry (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
317-278-7844 (Phone)

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