Private Information in Executive Compensation: The Information Role vs. The Monitoring Role of the Board

Abstract

Manuscript Type: Empirical Research Question/Issue: This paper examines the effect of boards of directors' characteristics on the use of private information in executive compensation. Research Findings/Insights: We predict and find that boards' competence both in information acquisition and in monitoring influences the extent to which boards use private performance measures in CEO compensation. Specifically, smaller and more independent boards with their CEOs as the board chair are found to rely more heavily on private performance measures. The documented effects of board characteristics disappear after the passage of SOX, likely due to the homogenized composition of boards and compensation committees brought by the legislated changes. Theoretical/Academic Implications: The paper extends the literature on the board's role in executive compensation. Although prior evidence is abundant on how boards affect the alignment of CEO compensation with public performance measures, little is known about boards' use of private information to compensate CEOs. It also extends the literature on the role of corporate boards by examining both their monitoring and information roles. Practitioner/Policy Implications: This study offers insights to regulators regarding the role of boards of directors in monitoring and their role in private information acquisition. It highlights the importance of considering the tradeoff between these two roles when regulating corporate governance rules.