Independent Directors, Executive Pay, and Firm Performance

Abstract

In the wake of the recent runaway executive compensation and corporate scandals, professions in many circles are calling for more representation by independent directors in American boardrooms. This paper examines the question of whether such directors could reduce executive pay and enhance corporate performance. Using a sample of the largest U.S. corporations, I find that firm and industry differences alone explain most of the variation in executive pay. My results also indicate that ownership and board characteristics have little impact on executive pay. In particular, managers are not paid less and corporate performances are not improved for boards with more representation by independent directors. This paper has policy implications regarding the recent proposed change in listing requirements in the NYSE and Nasdaq.

Keywords: Executive Compensation, Independent Directors, Stock Options

JEL Classification: G32, J33