Does the compensation level of outside director depend on its personal profile? Some evidence from UK

Abstract

Corporate governance, Board of directors, Outside director, Remuneration policy, G3, G2, J44,

The remuneration of independent directors in the UK and Italy: An empirical analysis based on agency theory

“…Those studies have mainly focused on the adoption of performance-based remuneration to reduce the potentially misaligned interest between shareholders and INEDs (e.g., Hempel and Fay, 1994;Boyd, 1996;Bryan, Hwang, Klein & Lilien , 2000;Cordeiro et al, 2000) or the adoption of meeting fees to provide INEDs with an incentive to exert more effort (Hempel and Fay 1994;Bryan et al 2000;Brick, Palmon & Waldet, 2006;Farrell, Friesen & Hersch, 2008;Adams and Ferreira 2008). A more comprehensive agency theory framework was adopted by Cordeiro et al (2000), Andreas et al (2012) and Marchetti & Stefanelli (2009). These studies still rely on an optimal contracting perspective of agency theory, but consider not only firm performance and meeting fees as potential determinants of INEDs' remuneration but also INEDs' roles within the board and firm complexity.…”

“…According to this perspective, inter-directorial differences in remuneration may rather stem from taking on additional functions and responsibilities (e.g., chairmanship or committee membership) or variations in meeting attendance (Hempel & Fay, 1994;Brick et al, 2006;Farrell et al, 2008;Marchetti & Stefanelli, 2009), although Cordeiro et al (2000) found mixed evidence between outside (non-executive) director's remuneration and measures of director's effort. However overall we would expect that the effort that an INED expends is usually directly related to his/her responsibilities in the board (Linck et al, 2009;Engel, Hayes & Wang, 2010).…”

“…As firm size (Hempel & Fay, 1994;Boyd, 1996;Marchetti & Stefanelli, 2009;Andreas et al, 2012) and industry (Ely, 1991) are likely to affect directors' remuneration, the sample was selected so that UK and Italian firms were not significantly different from each other in terms of industry and size. By using a stratified random procedure the population is first divided into a number of parts or strata according to some characteristics, chosen to be related to the major variables being studied.…”

“…Following previous studies (e.g., Marchetti & Stefanelli, 2009, Andreas et al 2012, our dependent variable (Remuneration) is the natural logarithm of the total remuneration received by an INED during a financial year ( 2 ), measured as the sum of total fees and performance-related pay ( 3 ) (used by some companies although not recognised as best practice).…”

“…Following previous literature (Hempel & Fay, 1994;Cordeiro et al, 2000;Brick et al, 2006;Farrell et al, 2008;Marchetti & Stefanelli, 2009;Engel et al, 2010), director's observable effort and responsibilities were measured as follows: …”