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Incentive pay for non-executive directors: The direct and interaction effects on firm performance

Author

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  • Pattarin Adithipyangkul

    (Curtin University of Technology)

  • T. Y. Leung

    (Open University of Hong Kong)

Abstract

To improve corporate governance and firm performance, institutional investors and influential activists in the US recommend the use of incentive pay for non-executive directors. Policy makers in the UK and Australia, however, recommend against it. Motivated by stark contrast in the recommendations from these Anglo-Saxon countries, this paper investigates the impacts of incentive pay for non-executive directors on firm performance. The findings based on data from 178 listed Australian companies support both recommendations. Firm performance tends to be better when no incentive or high-power incentives are offered to non-executive directors than when low-power incentives are offered. This paper also investigates how incentive pay interacts with monitoring by large shareholders and debtholders to influence firm performance. This paper shows that large shareholder monitoring interacts negatively while debtholder monitoring interacts positively with incentive pay for non-executive directors to affect firm performance. Overall, the findings suggest that governance mechanisms recommended by agency theorists such as performance-contingent pay and monitoring can backfire if they are not designed properly. Both the direct and interaction effects should be considered when practitioners design corporate governance systems.

Suggested Citation

  • Pattarin Adithipyangkul & T. Y. Leung, 2018. "Incentive pay for non-executive directors: The direct and interaction effects on firm performance," Asia Pacific Journal of Management, Springer, vol. 35(4), pages 943-964, December.
  • Handle: RePEc:kap:asiapa:v:35:y:2018:i:4:d:10.1007_s10490-017-9534-z
    DOI: 10.1007/s10490-017-9534-z
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    More about this item

    Keywords

    Corporate governance; Incentives; Intrinsic motivation; Monitoring; Non-executive director compensation;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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