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Cash versus incentive compensation: Lawsuits and director pay

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  • Crutchley, Claire E.
  • Minnick, Kristina

Abstract

The role of the board of directors is to oversee managerial decisions and to protect the interests of shareholders. While director pay historically is a small cash fee, many corporations now use both stock and option grants as a part of a director's compensation. This paper examines whether this incentive pay aligns the interests of directors with those of the shareholders. We study the special case of shareholder lawsuits that specifically name the board of directors. These lawsuits indicate a breakdown in the trust and therefore the relationship between shareholders and directors. We find that when directors are paid with high incentive pay (designed to align their interests with shareholders) there is a greater incidence of lawsuits. Interestingly, greater cash compensation actually reduces the likelihood of a lawsuit.

Suggested Citation

  • Crutchley, Claire E. & Minnick, Kristina, 2012. "Cash versus incentive compensation: Lawsuits and director pay," Journal of Business Research, Elsevier, vol. 65(7), pages 907-913.
    • Handle: RePEc:eee:jbrese:v:65:y:2012:i:7:p:907-913
    DOI: 10.1016/j.jbusres.2011.05.008
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    Cited by:

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    2. Zaman, Rashid & Atawnah, Nader & Baghdadi, Ghasan A. & Liu, Jia, 2021. "Fiduciary duty or loyalty? Evidence from co-opted boards and corporate misconduct," Journal of Corporate Finance, Elsevier, vol. 70(C).
    3. Cheng-Feng Cheng, 2012. "Evaluate the Effectiveness of Manager Compensation," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 25-44, June.
    4. Crutchley, Claire E. & Minnick, Kristina & Schorno, Patrick J., 2015. "When governance fails: Naming directors in class action lawsuits," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 81-96.
    5. Ralf Winkler & Maximilian Behrmann, 2019. "Aufsichtsratsvergütung und Überwachungseffektivität: Empirische Befunde für börsennotierte Gesellschaften in Deutschland [Supervisory Board Compensation and Monitoring Effectiveness: Evidence from ," Schmalenbach Journal of Business Research, Springer, vol. 71(3), pages 381-414, November.
    6. Canace, Thomas G. & Cianci, Anna M. & (Kelvin) Liu, Xiaotao & Tsakumis, George T., 2020. "Paid for looks when others are looking: CEO facial traits, compensation, and corporate visibility," Journal of Business Research, Elsevier, vol. 115(C), pages 85-100.

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