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The design of incentive compensation for directors

Chun‐Keung Hoi (Associate Professor of Finance at the RIT College of Business. His area of expertise is corporate governance and has published articles in journals such as Financial Management and the Journal of Finance. He has also been interviewed and quoted in outlets such as the Wall Street Journal and CNNfn. His teaching interests are in the areas of corporate finance and financial modeling. Tel: 585 475 2718, Fax: 585 475 6920, E‐mail: shoi@cob.rit.edu)
Ashok Robin (Professor of Finance at the RIT College of Business. His interests are in corporate governance and accounting. He has published articles in journals such as Financial Management, Journal of Financial Research and Journal of Accounting and Economics. His teaching interests are in the areas of risk management and international finance. Tel: 585 475 5211, Fax: 585 475 6920, E‐mail: ajrbbu@rit.edu)

Corporate Governance

ISSN: 1472-0701

Article publication date: 1 September 2004

Abstract

Today, most firms provide equity‐based incentive compensation to their non‐executive directors. We summarize viewpoints supportive and critical of this development. We argue that the effectiveness of incentive compensation is related to the structure of the incentive pay contact. We discuss the use of options and shares as well as the issue of whether incentive pay should be geared towards current rewards or future incentives. We also discuss the critical issue of maintaining the ownership exposure of directors by providing sufficient levels of equity as well as placing restrictions on cashing out. Using our arguments above, we suggest guidelines for constructing an optimal contract. We compare 289 incentive plans offered by public companies in the USA during 1988‐1998 and find that plans deviate significantly from the optimum.

Keywords

Citation

Hoi, C. and Robin, A. (2004), "The design of incentive compensation for directors", Corporate Governance, Vol. 4 No. 3, pp. 47-53. https://doi.org/10.1108/14720700410547495

Publisher

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Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited