Cash versus incentive compensation: Lawsuits and director pay

The role of the board of directors is to oversee managerial decisions and to protect the interests of shareholders. While director pay historically is a small cash fee, many corporations now use both stock and option grants as a part of a director's compensation. This paper examines whether thi...

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Bibliographic Details
Published in:Journal of business research 2012-07, Vol.65 (7), p.907-913
Main Authors: Crutchley, Claire E., Minnick, Kristina
Format: Article
Language:English
Subjects:
Board of directors
Boards of directors
Compensation
Corporate governance
Executive compensation
Financial incentives
Lawsuits
Litigation
Options
Pay for performance
Stock options
Stockholders
Studies
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Summary:The role of the board of directors is to oversee managerial decisions and to protect the interests of shareholders. While director pay historically is a small cash fee, many corporations now use both stock and option grants as a part of a director's compensation. This paper examines whether this incentive pay aligns the interests of directors with those of the shareholders. We study the special case of shareholder lawsuits that specifically name the board of directors. These lawsuits indicate a breakdown in the trust and therefore the relationship between shareholders and directors. We find that when directors are paid with high incentive pay (designed to align their interests with shareholders) there is a greater incidence of lawsuits. Interestingly, greater cash compensation actually reduces the likelihood of a lawsuit.
ISSN:0148-2963
1873-7978
DOI:10.1016/j.jbusres.2011.05.008