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Public Thrift, Private Perks: Signaling Board Independence with Executive Pay

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  • PABLO RUIZ‐VERDÚ
  • RAVI SINGH

Abstract

We analyze how boards' reputational concerns influence executive compensation and the use of hidden pay. Independent boards reduce disclosed pay to signal their independence, but are more likely than manager‐friendly boards to use hidden pay or to distort incentive contracts. Stronger reputational pressures lead to lower disclosed pay, weaker managerial incentives, and higher hidden pay, whereas greater transparency of executive compensation has the opposite effects. Although reputational concerns can induce boards to choose compensation contracts more favorable to shareholders, we show that there is a threshold beyond which stronger reputational concerns harm shareholders. Similarly, excessive pay transparency can harm shareholders.

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  • Pablo Ruiz‐Verdú & Ravi Singh, 2021. "Public Thrift, Private Perks: Signaling Board Independence with Executive Pay," Journal of Finance, American Finance Association, vol. 76(2), pages 845-891, April.
    • Handle: RePEc:bla:jfinan:v:76:y:2021:i:2:p:845-891
    DOI: 10.1111/jofi.12989
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