Essays on board of director compensation.

Abstract

This dissertation consists of three essays that explore topics on the board of directors of profit-making corporations. Special emphasis is given to the evolution and determinants of outside director compensation. Essay 1 presents a comprehensive review of the literature on boards. Essay 2 investigates the evolution of board compensation over the period 1979--2000. Overall, inflation-adjusted outside director compensation has increased on average 1.7% per year over the last 20 years. Manufacturing firms tend to provide larger compensation to outside directors than do financials or service related corporations. Cross-sectional dispersion in aggregate compensation is largely explained by industry sector (manufacturing, financial, non-financial service) and firm size. During the last 18 years the use of stock-based compensation plans for outside directors has dramatically increased. Stock-based compensation for outside directors takes the form of option grants and restricted stock grants and partial payment of basic annual compensation with stock. Smaller companies more frequently use option grants while larger firms more frequently use restricted stock grants. Recent changes in compensation practices are more consistent with the view that the normative goal of the board should be shareholder wealth creation than the alternative of shareholders' interest optimization.

Essay 3 examines whether the variation in compensation across firms can be explained by differences in investment opportunity sets. The results indicate that variation in outside director compensation among firms is consistent with the hypothesis that director compensation is designed to reduce agency costs. Firms with more growth opportunities pay more to their outside board members than do non-growth firms. Growth firms also pay a larger proportion of compensation in the form of stock compared to non-growth firms.