Remuneration, Retention, and Reputation Incentives for Outside Directors
43 Pages Posted: 24 Oct 2003
Date Written: February 2003
I study the strength of performance incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Previous research has only shown these relations to apply under extreme circumstances such as financial distress. Each incentive mechanism exhibits statistical significance, and together they provide directors with wealth increases of approximately 11 cents per $1,000 rise in firm value. Although much smaller than the performance sensitivities of CEOs, outside directors' incentives imply a change in wealth of about $285,000 for a one standard deviation change in typical firm performance. Cross-sectional patterns of director stock option holdings conform to agency and financial contracting theories.
Keywords: Boards of directors, stock options
JEL Classification: G34, J44
Suggested Citation: Suggested Citation