Board Compensation and Firm Performance: The Role of 'Independent' Board Members

38 Pages Posted: 2 Nov 2005

See all articles by Nuno Fernandes

Nuno Fernandes

Catolica Lisbon School of Business and Economics; IMD International

Date Written: December 2005

Abstract

This paper examines the link between firm performance, board structure and top executive pay. We use a panel of firms from the Portuguese Stock Market, where the institutional context differs markedly from the U.K. and U.S., but is very similar to most other European countries. The standard organizational structure is a single-tier board, which includes the CEO as well as executive and non-executive members. The results confirm a large effect of firm size on top executive compensation. However there is no relationship between the board remuneration and company performance. We examine whether the governance structure of companies is relevant in influencing top executive pay. Specifically, we consider the role of non-executive board members as mediators of the management and shareholders relationship. Our results suggest that firms with more non-executive board members pay higher wages to their executives. Furthermore, we find that firms with zero non-executive board members actually have less agency problems, and have a better alignment of shareholders' and managers' interests. These results cast some doubts on the effectiveness of independent board members incentive systems, and on their stated monitoring role.

Keywords: Executive Compensation, Corporate Governance, Independent Directors, Firm Performance

JEL Classification: G15, G30, G34

Suggested Citation

Fernandes, Nuno, Board Compensation and Firm Performance: The Role of 'Independent' Board Members (December 2005). ECGI - Finance Working Paper No. 104/2005. Available at SSRN: https://ssrn.com/abstract=830244 or http://dx.doi.org/10.2139/ssrn.830244

Nuno Fernandes (Contact Author)

Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

IMD International ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
3,548
rank
2,474
Abstract Views
11,530
PlumX