The effects of outside directors and board shareholdings on the relation between chief executive compensation and firm performance

Leslie Kren, Jeffrey L. Kerr

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Abstract

Critics of corporate governance have suggested that improvements in board monitoring will arise from more independent boards consisting of outside directors and from increased stock ownership by directors. Presumably these changes should result in more rational, more defensible compensation decisions in which pay is clearly tied to results. In this paper, we test the premise that boards with a relatively higher proportion of outsiders and boards with significant shareholdings maintain a closer link between corporate performance and executive pay than do boards with fewer outsiders and boards holding little stock. The results of the study, based on a sample of 268 large corporations, are mixed. As expected, boards with significant shareholdings maintain a stronger linkage between compensation and firm-level performance. This finding persists even after controls are included for CEO and outsider shareholdings. Contrary to expectations, however, evidence was not found that firms with a higher proportion of outsiders on the board of directors relate compensation more strongly to firm results.

Original languageEnglish (US)
Pages (from-to)297-309
Number of pages13
JournalAccounting and Business Research
Volume27
Issue number4
DOIs
StatePublished - Jan 1 1997

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ASJC Scopus subject areas

  • Accounting

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