Directors’ compensation. what really matters?
Abstract
In the current scenario of increasing social inequality, the debate over the compensation received by directors and executives of large listed companies, and its justification, has intensified. Drawing on Agency Theory and Human Capital Theory, a multilevel analytical technique is used in this paper to examine the influence of firm-level variables and director-level variables on the individual compensation of the members of the board. The results obtained for the continental European context (Spain in particular) partially support the Human Capital Theory. Nevertheless, there is no evidence supportive of Agency Theory, as corporate governance mechanisms do not contribute to moderate the compensation of directors and there is no relationship between corporate performance and the compensation of directors. The analyses by subsamples (categories of directors) reveal that non-executive director’s compensation seems to be set for a group of individuals as a whole, depending mainly on firm-level characteristics, whereas executive director compensation is more based on the unique characteristics that a particular executive brings to the board.
Keyword : compensation, board of directors, Agency Theory, tenure, experience, multilevel
How to Cite
Acero, I., & Alcalde, N. (2020). Directors’ compensation. what really matters?. Journal of Business Economics and Management, 21(1), 180-199. https://doi.org/10.3846/jbem.2020.11788
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Aguinis, H., Martin, G. P., Gomez-Mejia, L. R., O’Boyle Jr. E. H., & Joo, H. (2018). The two sides of CEO pay injustice: A power law conceptualization of CEO over and underpayment. Management Research: Journal of the Iberoamerican Academy of Management, 16(1), 3–30. https://doi.org/10.1108/MRJIAM-02-2017-0731
Andreas, J. M., Rapp, M. S., & Wolff, M. (2012). Determinants of director compensation in two-tier systems: evidence from German panel data. Review of Managerial Science, 6(1), 33–79. https://doi.org/10.1007/s11846-010-0048-z
Andrés, P., Arranz-Aperte, L., & Rodríguez-Sanz, J. A. (2017). Independent versus non-independent outside directors in European companies: Who has a say on CEO compensation?. BRQ Business Research Quarterly, 20(2), 79–95. https://doi.org/10.1016/j.brq.2017.02.001
Arrondo, R., Fernández, C., & Fernández, E. (2008). Influencia de la estructura de gobierno corporativo sobre la remuneración de los consejeros en el mercado español. Información Comercial Española, ICE: Revista de economía, 844, 187–203.
Baixauli-Soler, J. S., Lucas-Perez, M. E., Martin-Ugedo, J., Minguez-Vera, A., & Sanchez-Marin, G. (2016). Executive directors’ compensation and monitoring: the influence of gender diversity on Spanish boards. Journal of Business Economics and Management, 17(6), 1133–1154. https://doi.org/10.3846/16111699.2014.969767
Barkema, H. G., & Gomez-Mejía, L. R. (1998). Managerial compensation and firm performance: A general research framework. Academy of Management Journal, 41(2), 135–145. https://doi.org/10.2307/257098
Bebchuk, L. A., & Fried, J. M. (2004). Stealth compensation via retirement benefits (Working Paper 10742). National Bureau of Economic Research. https://doi.org/10.3386/w10742
Bebchuk, L. A., Fried, J. M., & Walker, D. I. (2002). Managerial power and rent extraction in the design of executive compensation (Working Paper 9068). National Bureau of Economic Research. https://doi.org/10.3386/w9068
Becker, G. S. (1964). Human capital theory. Columbia, New York.
Boone, A. L., Field, L. C., Karpoff, J. M., & Raheja, C. G. (2007). The determinants of corporate board size and composition: An empirical analysis. Journal of Financial Economics, 85(1), 66–101. https://doi.org/10.1016/j.jfineco.2006.05.004
Borisova, G., Salas, J. M., & Zagorchev, A. (2019). CEO compensation and government ownership. Corporate Governance: An International Review, 27(2), 120–143. https://doi.org/10.1111/corg.12265
Brick, I. E., Palmon, O., & Wald, J. K. (2006). CEO compensation, director compensation, and firm performance: Evidence of cronyism?. Journal of Corporate Finance, 12(3), 403–423. https://doi.org/10.1016/j.jcorpfin.2005.08.005
Bugeja, M., Fohn, S., & Matolcsy, Z. (2016). Determinants of the levels and changes in non‐executive director compensation. Accounting & Finance, 56(3), 627–667. https://doi.org/10.1111/acfi.12093
Chen, Z., & Keefe, M. O. C. (2018). Board of director compensation in China: To pay or not to pay? How much to pay? Emerging Markets Review, 37, 66–82. https://doi.org/10.1016/j.ememar.2018.05.003
Coles, J. L., Daniel, N. D., & Naveen, L. (2008). Boards: Does one size fit all? Journal of Financial Economics, 87(2), 329–356. https://doi.org/10.1016/j.jfineco.2006.08.008
Cordeiro, J., Veliyath, R., & Eramus, E. (2000). An empirical investigation of the determinants of outside director compensation. Corporate Governance: An International Review, 8(3), 268–279. https://doi.org/10.1111/1467-8683.00204
Elston, J. A., & Goldberg, L. G. (2003). Executive compensation and agency costs in Germany. Journal of Banking & Finance, 27(7), 1391–1410. https://doi.org/10.1016/S0378-4266(02)00274-1
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law & Economics, 26(2), 301–325. https://doi.org/10.1086/467037
Farrell, K. A., Friesen, G. C., & Hersch, P. L. (2008). How do firms adjust director compensation?. Journal of Corporate Finance, 14(2), 153–162. https://doi.org/10.1016/j.jcorpfin.2008.02.004
Fedaseyeu, V., Linck, J. S., & Wagner, H. F. (2018). Do qualifications matter? New evidence on board functions and director compensation. Journal of Corporate Finance, 48, 816–839. https://doi.org/10.1016/j.jcorpfin.2017.12.009
Ferris, S. P., Liao, M. Y. S., & Tamm, C. (2018). The compensation of busy directors: An international analysis. Research in International Business and Finance, 46, 294–312. https://doi.org/10.1016/j.ribaf.2018.04.003
Finkelstein, S., Hambrick, D. C., & Cannella, A. A. (2009). Strategic leadership: Theory and research on executives, top management teams, and boards. Oxford University Press, USA.
Goh, L., & Gupta, A. (2016). Remuneration of non-executive directors: Evidence from the UK. The British Accounting Review, 48(3), 379–399. https://doi.org/10.1016/j.bar.2015.05.001
Goldstein, H. (1995). Hierarchical data modeling in the social sciences. Journal of Educational and Behavioral Statistics, 20(2), 201–204. https://doi.org/10.3102/10769986020002201
Gómez-Mejía, L. R., & Marín, G. S. (2006). La retribución y los resultados de la organización: investigación y práctica empresarial. Pearson Educación.
Hempel, P., & Fay, C. (1994). Outside director compensation and firm performance. Human Resource Management, 33(1), 111–133. https://doi.org/10.1002/hrm.3930330107
Hermalin, B. E., & Weisbach, M. S. (1988). The determinants of board composition. The RAND Journal of Economics, 19, 589–606.
Hillman, A. J., & Dalziel, Th. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management Review, 28(3), 383–396. https://doi.org/10.5465/amr.2003.10196729
Horton, J., Millo, Y., & Serafeim, G. (2012). Resources or power? Implications of social networks on compensation and firm performance. Journal of Business Finance & Accounting, 39(3–4), 399–426. https://doi.org/10.1111/j.1468-5957.2011.02276.x
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831–880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Johnson, S. G., Schnatterly, K., & Hill, A. D. (2013). Board composition beyond independence social capital, human capital, and demographics. Journal of Management, 39(1), 232–262. https://doi.org/10.1177/0149206312463938
Kor, Y. Y., & Sundaramurthy, Ch. (2009). Experience-based human capital and social capital of outside directors. Journal of Management, 35(4), 981–1006. https://doi.org/10.1177/0149206308321551
Lehn, K. M., Patro, S., & Zhao, M. (2009). Determinants of the size and composition of US corporate boards: 1935‐2000. Financial Management, 38(4), 747–780. https://doi.org/10.1111/j.1755-053X.2009.01055.x
Linck, J. S., Netter, J. M., & Yang, T. (2008). The determinants of board structure. Journal of Financial Economics, 87(2), 308–328. https://doi.org/10.1016/j.jfineco.2007.03.004
Linn, S. C., & Park, D. (2005). Outside director compensation policy and the investment opportunity set. Journal of Corporate Finance, 11(4), 680–715. https://doi.org/10.1016/j.jcorpfin.2004.11.002
López-Iturriaga, F., García-Meca, E., & Tejerina-Gaite, F. (2015). Institutional directors and board compensation: Spanish evidence. BRQ Business Research Quarterly, 18(3), 161–173. https://doi.org/10.1016/j.brq.2014.07.003
Marchetti, P., & Stefanelli, V. (2009). Does the compensation level of outside director depend on its personal profile? Some evidence from UK. Journal of Management & Governance, 13(4), 325–354. https://doi.org/10.1007/s10997-009-9086-9
Mincer, J. (1974). Schooling, experience, and earnings (Human behavior & social institutions). (No. 2, 1st ed.).
Murphy, K. J. (2013). Executive compensation: Where we are, and how we got there. In Handbook of the Economics of Finance (vol. 2, pp. 211–356). Elsevier. https://doi.org/10.1016/B978-0-44-453594-8.00004-5
Pardo, A., Ruiz, M. A., & San Martín, R. (2007). Cómo ajustar e interpretar modelos multinivel con SPSS. Psicothema, 19(2), 308–321.
Ryan, H. E., & Wiggins, R. A. (2004). Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73(3), 497–524. https://doi.org/10.1016/j.jfineco.2003.11.002
Sanchez-Marin, G., Baixauli-Soler, J. S., & Lucas-Perez, M. E. (2011). Ownership structure and board effectiveness as determinants of TMT compensation in Spanish listed firms. Journal of Business Economics and Management, 12(1), 92–109. https://doi.org/10.3846/16111699.2011.555371
Seo, J. (2015). Monitoring complexity, and CEO pay-for-performance sensitivity. Human Resource Management, 2017, 56(3), 373–388. https://doi.org/10.1002/hrm.21769
Shen, J. (2016). Principles and applications of multilevel modeling in human resource management research. Human Resource Management, 55(6), 951–965. https://doi.org/10.1002/hrm.21666
Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. The Journal of Political Economy, 94(3), 461–488. https://doi.org/10.1086/261385
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Snijders, T. A., & Bosker, R. J. (2012). Multilevel analysis: An introduction to basic and advance multilevel modeling (2nd ed.). Sage.
Song, W. L., & Wan, K. M. (2019). Does CEO compensation reflect managerial ability or managerial power? Evidence from the compensation of powerful CEOs. Journal of Corporate Finance, 56, 1–14. https://doi.org/10.1016/j.jcorpfin.2018.11.009
Sur, S., Magnan, M., & Cordeiro, J. (2015). Disentangling CEO compensation: A simultaneous examination of time, industry, and firm‐level effects. Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l’Administration, 32(1), 30–46. https://doi.org/10.1002/cjas.1304
Vo, T. T. N., & Canil, J. M. (2019). CEO pay disparity: Efficient contracting or managerial power?. Journal of Corporate Finance, 54, 168–190. https://doi.org/10.1016/j.jcorpfin.2016.10.002
Weisbach, M. S. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20, 431– 460. https://doi.org/10.1016/0304-405X(88)90053-0
Yermack, D. (2004). Remuneration, retention, and reputation incentives for outside directors. The Journal of Finance, 59(5), 2281–2308. https://doi.org/10.1111/j.1540-6261.2004.00699.x
Aguinis, H., Gottfredson, R. K., & Culpepper, S. A. (2013). Best-practice recommendations for estimating cross-level interaction effects using multilevel modeling. Journal of Management, 39(6), 1490–1528. https://doi.org/10.1177/0149206313478188
Aguinis, H., Martin, G. P., Gomez-Mejia, L. R., O’Boyle Jr. E. H., & Joo, H. (2018). The two sides of CEO pay injustice: A power law conceptualization of CEO over and underpayment. Management Research: Journal of the Iberoamerican Academy of Management, 16(1), 3–30. https://doi.org/10.1108/MRJIAM-02-2017-0731
Andreas, J. M., Rapp, M. S., & Wolff, M. (2012). Determinants of director compensation in two-tier systems: evidence from German panel data. Review of Managerial Science, 6(1), 33–79. https://doi.org/10.1007/s11846-010-0048-z
Andrés, P., Arranz-Aperte, L., & Rodríguez-Sanz, J. A. (2017). Independent versus non-independent outside directors in European companies: Who has a say on CEO compensation?. BRQ Business Research Quarterly, 20(2), 79–95. https://doi.org/10.1016/j.brq.2017.02.001
Arrondo, R., Fernández, C., & Fernández, E. (2008). Influencia de la estructura de gobierno corporativo sobre la remuneración de los consejeros en el mercado español. Información Comercial Española, ICE: Revista de economía, 844, 187–203.
Baixauli-Soler, J. S., Lucas-Perez, M. E., Martin-Ugedo, J., Minguez-Vera, A., & Sanchez-Marin, G. (2016). Executive directors’ compensation and monitoring: the influence of gender diversity on Spanish boards. Journal of Business Economics and Management, 17(6), 1133–1154. https://doi.org/10.3846/16111699.2014.969767
Barkema, H. G., & Gomez-Mejía, L. R. (1998). Managerial compensation and firm performance: A general research framework. Academy of Management Journal, 41(2), 135–145. https://doi.org/10.2307/257098
Bebchuk, L. A., & Fried, J. M. (2004). Stealth compensation via retirement benefits (Working Paper 10742). National Bureau of Economic Research. https://doi.org/10.3386/w10742
Bebchuk, L. A., Fried, J. M., & Walker, D. I. (2002). Managerial power and rent extraction in the design of executive compensation (Working Paper 9068). National Bureau of Economic Research. https://doi.org/10.3386/w9068
Becker, G. S. (1964). Human capital theory. Columbia, New York.
Boone, A. L., Field, L. C., Karpoff, J. M., & Raheja, C. G. (2007). The determinants of corporate board size and composition: An empirical analysis. Journal of Financial Economics, 85(1), 66–101. https://doi.org/10.1016/j.jfineco.2006.05.004
Borisova, G., Salas, J. M., & Zagorchev, A. (2019). CEO compensation and government ownership. Corporate Governance: An International Review, 27(2), 120–143. https://doi.org/10.1111/corg.12265
Brick, I. E., Palmon, O., & Wald, J. K. (2006). CEO compensation, director compensation, and firm performance: Evidence of cronyism?. Journal of Corporate Finance, 12(3), 403–423. https://doi.org/10.1016/j.jcorpfin.2005.08.005
Bugeja, M., Fohn, S., & Matolcsy, Z. (2016). Determinants of the levels and changes in non‐executive director compensation. Accounting & Finance, 56(3), 627–667. https://doi.org/10.1111/acfi.12093
Chen, Z., & Keefe, M. O. C. (2018). Board of director compensation in China: To pay or not to pay? How much to pay? Emerging Markets Review, 37, 66–82. https://doi.org/10.1016/j.ememar.2018.05.003
Coles, J. L., Daniel, N. D., & Naveen, L. (2008). Boards: Does one size fit all? Journal of Financial Economics, 87(2), 329–356. https://doi.org/10.1016/j.jfineco.2006.08.008
Cordeiro, J., Veliyath, R., & Eramus, E. (2000). An empirical investigation of the determinants of outside director compensation. Corporate Governance: An International Review, 8(3), 268–279. https://doi.org/10.1111/1467-8683.00204
Elston, J. A., & Goldberg, L. G. (2003). Executive compensation and agency costs in Germany. Journal of Banking & Finance, 27(7), 1391–1410. https://doi.org/10.1016/S0378-4266(02)00274-1
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law & Economics, 26(2), 301–325. https://doi.org/10.1086/467037
Farrell, K. A., Friesen, G. C., & Hersch, P. L. (2008). How do firms adjust director compensation?. Journal of Corporate Finance, 14(2), 153–162. https://doi.org/10.1016/j.jcorpfin.2008.02.004
Fedaseyeu, V., Linck, J. S., & Wagner, H. F. (2018). Do qualifications matter? New evidence on board functions and director compensation. Journal of Corporate Finance, 48, 816–839. https://doi.org/10.1016/j.jcorpfin.2017.12.009
Ferris, S. P., Liao, M. Y. S., & Tamm, C. (2018). The compensation of busy directors: An international analysis. Research in International Business and Finance, 46, 294–312. https://doi.org/10.1016/j.ribaf.2018.04.003
Finkelstein, S., Hambrick, D. C., & Cannella, A. A. (2009). Strategic leadership: Theory and research on executives, top management teams, and boards. Oxford University Press, USA.
Goh, L., & Gupta, A. (2016). Remuneration of non-executive directors: Evidence from the UK. The British Accounting Review, 48(3), 379–399. https://doi.org/10.1016/j.bar.2015.05.001
Goldstein, H. (1995). Hierarchical data modeling in the social sciences. Journal of Educational and Behavioral Statistics, 20(2), 201–204. https://doi.org/10.3102/10769986020002201
Gómez-Mejía, L. R., & Marín, G. S. (2006). La retribución y los resultados de la organización: investigación y práctica empresarial. Pearson Educación.
Hempel, P., & Fay, C. (1994). Outside director compensation and firm performance. Human Resource Management, 33(1), 111–133. https://doi.org/10.1002/hrm.3930330107
Hermalin, B. E., & Weisbach, M. S. (1988). The determinants of board composition. The RAND Journal of Economics, 19, 589–606.
Hillman, A. J., & Dalziel, Th. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management Review, 28(3), 383–396. https://doi.org/10.5465/amr.2003.10196729
Horton, J., Millo, Y., & Serafeim, G. (2012). Resources or power? Implications of social networks on compensation and firm performance. Journal of Business Finance & Accounting, 39(3–4), 399–426. https://doi.org/10.1111/j.1468-5957.2011.02276.x
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831–880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Johnson, S. G., Schnatterly, K., & Hill, A. D. (2013). Board composition beyond independence social capital, human capital, and demographics. Journal of Management, 39(1), 232–262. https://doi.org/10.1177/0149206312463938
Kor, Y. Y., & Sundaramurthy, Ch. (2009). Experience-based human capital and social capital of outside directors. Journal of Management, 35(4), 981–1006. https://doi.org/10.1177/0149206308321551
Lehn, K. M., Patro, S., & Zhao, M. (2009). Determinants of the size and composition of US corporate boards: 1935‐2000. Financial Management, 38(4), 747–780. https://doi.org/10.1111/j.1755-053X.2009.01055.x
Linck, J. S., Netter, J. M., & Yang, T. (2008). The determinants of board structure. Journal of Financial Economics, 87(2), 308–328. https://doi.org/10.1016/j.jfineco.2007.03.004
Linn, S. C., & Park, D. (2005). Outside director compensation policy and the investment opportunity set. Journal of Corporate Finance, 11(4), 680–715. https://doi.org/10.1016/j.jcorpfin.2004.11.002
López-Iturriaga, F., García-Meca, E., & Tejerina-Gaite, F. (2015). Institutional directors and board compensation: Spanish evidence. BRQ Business Research Quarterly, 18(3), 161–173. https://doi.org/10.1016/j.brq.2014.07.003
Marchetti, P., & Stefanelli, V. (2009). Does the compensation level of outside director depend on its personal profile? Some evidence from UK. Journal of Management & Governance, 13(4), 325–354. https://doi.org/10.1007/s10997-009-9086-9
Mincer, J. (1974). Schooling, experience, and earnings (Human behavior & social institutions). (No. 2, 1st ed.).
Murphy, K. J. (2013). Executive compensation: Where we are, and how we got there. In Handbook of the Economics of Finance (vol. 2, pp. 211–356). Elsevier. https://doi.org/10.1016/B978-0-44-453594-8.00004-5
Pardo, A., Ruiz, M. A., & San Martín, R. (2007). Cómo ajustar e interpretar modelos multinivel con SPSS. Psicothema, 19(2), 308–321.
Ryan, H. E., & Wiggins, R. A. (2004). Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73(3), 497–524. https://doi.org/10.1016/j.jfineco.2003.11.002
Sanchez-Marin, G., Baixauli-Soler, J. S., & Lucas-Perez, M. E. (2011). Ownership structure and board effectiveness as determinants of TMT compensation in Spanish listed firms. Journal of Business Economics and Management, 12(1), 92–109. https://doi.org/10.3846/16111699.2011.555371
Seo, J. (2015). Monitoring complexity, and CEO pay-for-performance sensitivity. Human Resource Management, 2017, 56(3), 373–388. https://doi.org/10.1002/hrm.21769
Shen, J. (2016). Principles and applications of multilevel modeling in human resource management research. Human Resource Management, 55(6), 951–965. https://doi.org/10.1002/hrm.21666
Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. The Journal of Political Economy, 94(3), 461–488. https://doi.org/10.1086/261385
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Snijders, T. A., & Bosker, R. J. (2012). Multilevel analysis: An introduction to basic and advance multilevel modeling (2nd ed.). Sage.
Song, W. L., & Wan, K. M. (2019). Does CEO compensation reflect managerial ability or managerial power? Evidence from the compensation of powerful CEOs. Journal of Corporate Finance, 56, 1–14. https://doi.org/10.1016/j.jcorpfin.2018.11.009
Sur, S., Magnan, M., & Cordeiro, J. (2015). Disentangling CEO compensation: A simultaneous examination of time, industry, and firm‐level effects. Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l’Administration, 32(1), 30–46. https://doi.org/10.1002/cjas.1304
Vo, T. T. N., & Canil, J. M. (2019). CEO pay disparity: Efficient contracting or managerial power?. Journal of Corporate Finance, 54, 168–190. https://doi.org/10.1016/j.jcorpfin.2016.10.002
Weisbach, M. S. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20, 431– 460. https://doi.org/10.1016/0304-405X(88)90053-0
Yermack, D. (2004). Remuneration, retention, and reputation incentives for outside directors. The Journal of Finance, 59(5), 2281–2308. https://doi.org/10.1111/j.1540-6261.2004.00699.x