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Little is known about the economic environments and determinants of the compensation arrangements for outside board members. As delegated monitors of corporate management, board members act as shareholders' agents. Thus, a potential for misaligned interests exists, requiring in turn incentive arrangements that are incentive-compatible and individually rational. We study the economic determinants of both the levels and mix of compensation for outside board members. We also examine the effects of the existence of a director pension plan on the relation between director compensation and the hypothesized determinants. In sum, and contrary to criticism that the board of directors is often a passive, ineffective entity that dislikes conflict with incumbent management, we find that board compensation is structured to mitigate agency problems inherent in firms whose management control is separated from ownership.JEL classification: J33, D82, D23 Key Words: Director compensation, outside directors, director pension plan, incentive contracts, agency theory 1 For example, Rosenstein and Wyatt (1990) and Byrd and Hickman (1992) find that boards, especially those dominated by outsiders, appear to be effective in correcting severe corporate malfunctions. Weisbach (1988) finds that outsider-dominated boards are more likely to replace poorly performing CEOs. On the other hand, a growing body of evidence suggests that board characteristics are not significantly related to firm value [e

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