Board Gender Diversity and Equity-Based Compensation

Abstract

We study the effect of board gender diversity on executive and director equity-linked incentives. The provision of equity incentives to executives is costly for shareholders. We argue theoretically that the optimal compensation given to executives by a board with superior monitoring ability will involve lower equity incentives. If gender-diverse boards are superior monitors, the executives and directors in such firms would be compensated with lower equity incentives. We find that firms with gender-diverse boards compensate their executives and directors with lower equity incentives. Our results are robust to a battery of empirical tests, including alternative measures of equity incentives (pay-performance sensitivity), equity incentives of non-board executives, and gender diversity on compensation committees. Additionally, we employ a novel instrumental variable based on the grammatical gender marking of the language demographic in the US ZIP code in which a firm is headquartered.  ‎

Keywords: corporate boards, board gender diversity, executive compensation, director compensation, grammatical gender marking, equity-based compensation.