How do firms adjust director compensation?

Kathleen A. Farrell, Geoffrey C. Friesen, Philip L. Hersch

Research output: Contribution to journalArticlepeer-review

46 Scopus citations

Abstract

This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998-2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.

Original languageEnglish (US)
Pages (from-to)153-162
Number of pages10
JournalJournal of Corporate Finance
Volume14
Issue number2
DOIs
StatePublished - Apr 2008

Keywords

  • Board compensation
  • Board of directors
  • Contracting
  • Director compensation

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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