When is the Board’S Two Cents Worth More? Bod Pay and Firm Performance Under Contingencies

Abstract

This study examines how the board of directors’ pay structure may influence accounting- and market-based measures of firm performance, and how firm complexity in pay structure is associated with firm performance. We integrate the insights of the Board Capital View and Contingency theory to provide theoretical reasoning. A key premise is that in the presence of environmental uncertainty and competitive intensity, BOD members will be particularly motivated to leverage their resources and capabilities to the utmost to counsel the top management team for improving firm performance. We propose that BOD compensation will be associated with both accounting- and market-based measures of firm performance especially under contingencies. We test our assertions in the context of publicly traded U.S. firms listed on the NYSE, AMEX, and NASDAQ exchanges from 1992–2019, for a total of 20,931 firm years. We contribute to the governance literature by advancing knowledge of executive compensation and firm performance.

Keywords: board capital view, contingency theory, board of directors compensation, firm performance