Non-Management Director Options, Board Characteristics, and Future Firm Investments and Performance

Abstract

Non-Management Director Options, Board Characteristics, and Future Firm Investments and PerformanceThis paper examines if non-management director pay packages are set in ways consistent with the optimal contracting theory. Under this theory, directors issue stock option grants as a means for providing non-management directors incentives to monitor adequately the risk-taking and investment opportunities that managers of the firm undertake. Our results are consistent with this theory. Using a sample of over 5200 observations between 1997 and 2002, we find that (1) agency costs differ substantially across our sample, (2) boards systematically set their compensation contracts to address these agency costs, and (3) significantly positive links exist between the ratio of current stock option grants-to-total compensation and seven future investment, risk and firm performance variables. The investment variables are next period's change in research and development expenditures and change in capital expenditures. The risk variable is next year's stock return volatility. The firm performance variables are next period's Tobin's Q ratio, return on assets (ROA), a market return on current investments, and this period's stock return. Our results are incremental to board characteristics, CEO stock option grants, and economic, firm-specific, yearly, and industry control factors.

Determinants of director compensation in two-tier systems: evidence from German panel data

“…Evidently, the above arguments also apply to the level and the per-se existence of (performance-related) compensation schemes (Jensen and Meckling 1976;Smith and Watts 1992;Yermack 1995 Previous empirical studies largely corroborate the above hypotheses, with the exception of the firm's growth rate and diversification, for which mixed evidence exists (Yermack 2004;Bryan et al 2004). Evidence from German companies regarding the relevance of firm characteristics has been restricted to firm size to date, for which a positive relationship has also been found (Schmid 1997;Elston and Goldberg 2003).…”

“…However, we will refer to them in our development of the hypotheses and the discussion of the results. Relevant papers that we have identified via SSRN are from Perry (1999), Bryan et al (2000), Bryan and Klein (2004) and Adams (2003). Additionally, we searched the database of the Deutsche Nationalbibliothek for relevant dissertations that have not found their way into refereed journals.…”

“…Paralleling prior studies, we also consider the role of Institutional investors, which we also measure by a votingpower weighted dummy variable at a 10% threshold (e.g. Schmid 1997;Cordeiro 2000;Bryan et al 2004). …”

“…The results suggest that governance mechanisms do influence the level of director compensation according to the substitution hypothesis postulated in hypothesis H 5a . The coefficients of all introduced variables are negative, indicating that shareholders respond with lower levels of compensation if they have alternative instruments in place to monitor directors more directly (Schmid 1997;Bryan et al 2004). This can for example be assumed if the executive management already participates in stock value gains (Management Ownership) or when there is strong ownership control (Ownership Concentration).…”

The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey

“…Indeed, firms routinely use a variety of such incentives including additional fees for attending meetings, stock and option grants, and performance bonuses. For a sample of 1,198 firms in 2002, Stephen H. Bryan and Klein (2004) report that the average director received $102,976 in total annual compensation; of this, $71,839 was incentive pay and $31,137 was cash. The latter figure also contains an incentive component insofar as approximately $8,129 are attendance-contingent fees.…”