The governance of director compensation

Lily Fang and Sterling Huang

Journal of Financial Economics, 2024, vol. 155, issue C

Abstract: The average total compensation of directors in U.S.-listed companies was $342,030 in 2020, 5.06 times the median household income. Directors set their own pay, giving rise to potential self-dealing. We argue and document that in the presence of self-dealing, external mechanisms such as legal standards act as effective means of governance. Following a landmark Delaware court ruling that subjected director pay to a more stringent legal standard, Delaware-incorporated firms reduced director compensation relative to non-Delaware firms and experienced positive and non-transient stock price reactions. Our results indicate that proper governance of director compensation enhances firm value.

Keywords: Director compensation; Determinants; Self-dealing; Natural experiment; Seinfeld v. Slager (search for similar items in EconPapers)
JEL-codes: G30 G34 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:155:y:2024:i:c:s0304405x24000369

DOI: 10.1016/j.jfineco.2024.103813

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