The governance of director compensation

• Main Authors: FANG, Lily, HUANG, Sterling
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Determinants; Director compensation; Natural experiment; Seinfeld v. Slager; Self-dealing; Accounting; Corporate Finance; Human Resources Management
• Online Access: https://ink.library.smu.edu.sg/soa_research/2042; https://ink.library.smu.edu.sg/context/soa_research/article/3069/viewcontent/GovernanceDirComp_av.pdf
• Institution: Singapore Management University

The average total compensation of directors in U.S.-listed companies was $342,030 in 2020, 5.06 times the median household income. Directors set their own pay, giving rise to potential self-dealing. We argue and document that in the presence of self-dealing, external mechanisms such as legal standards act as effective means of governance. Following a landmark Delaware court ruling that subjected director pay to a more stringent legal standard, Delaware-incorporated firms reduced director compensation relative to non-Delaware firms and experienced positive and non-transient stock price reactions. Our results indicate that proper governance of director compensation enhances firm value.