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

42 Pages Posted: 6 May 2020 Last revised: 2 Dec 2022

See all articles by Kevin D. Chen

Kevin D. Chen

Duke University - Fuqua School of Business

Wayne R. Guay

University of Pennsylvania - Accounting Department

Richard Lambert

The Wharton School

Date Written: November 30, 2022

Abstract

This paper provides a framework for the joint design of board structure and executive compensation. The conventional view is that as a board monitors more intensely, high-powered equity incentives are less needed. However, to monitor effectively, the board requires information from the CEO, and without proper incentives, the CEO may not share the information. We formalize this intuition and show that CEO equity incentives are determined jointly with the monitoring level and advising expertise of the board. In equilibrium: board expertise and equity incentives are substitutes (complements) when the board has high (low) monitoring; equity incentives may be positively or negatively related to board monitoring, depending on the nature of board advice; and boards with greater monitoring also have higher expertise. Our analysis sheds light on the strong correlations between board structure and executive compensation observed in empirical studies and offers new testable predictions about the clustering of governance mechanisms.

Keywords: Board monitoring, board expertise, equity incentives, corporate governance, information sharing

JEL Classification: G30, G34, D83

Suggested Citation

Chen, Kevin and Guay, Wayne R. and Lambert, Richard, Multidimensional Corporate Governance: The Joint Design of Board Structure and Executive Compensation (November 30, 2022). Available at SSRN: https://ssrn.com/abstract=3584848 or http://dx.doi.org/10.2139/ssrn.3584848

Kevin Chen (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Richard Lambert

The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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