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Publication Board industry experience and executive compensation

Type

Working Paper

Institution(s)

University of Hamburg, University of St. Gallen

Year

2015

Author(s)

Wolfgang Drobetz
Felix von Meyerinck
David Oesch
Markus Schmid

Research Area

Corporate Finance, Corporate Governance

Keywords

Board of directors, director skills, director experience, executive compensation

Abstract

We relate the industry experience of the board of directors to their compensation policies. Using a sample of executives from industrial S&P1500 firms from 2000 to 2010, we find that more experienced boards provide larger option grants to CEOs and non-CEO executive. Consistently, we document higher equity as well as higher risk incentives of executive equity portfolios in firms where more experienced directors sit on the board, even after controlling for growth opportunities, firm size and performance, industry, and various other corporate governance and board characteristics. In additional tests we show that board industry experience predicts future value of executive incentives, while the opposite does not hold. These results suggest that board industry experience serve as a channel by which agency problems between shareholders and managers are resolved.

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