Research

How do firms adjust director compensation?

This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998-2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.

Publication Information
Article Title: How do firms adjust director compensation?
Journal: Journal of Corporate Finance (Mar, 2008)
14 (2)
Author(s): Farrell, Kathleen A;  Friesen, Geoffrey C;  Hersch, Philip L.
Researcher Information
    
Farrell, Kathleen A
Farrell, Kathleen A
James Jr. and Susan Stuart Endowed Dean of the College of Business
Expertise:
  • Corporate Finance
  • Executive Compensation
Dean's Office
CoB 301 D
P.O. Box 880405
University of Nebraska-Lincoln
Lincoln, NE 68588-0405, USA
Phone: (402) 472-9500
Fax: (402) 472-5140
kfarrell2@unl.edu
Friesen, Geoffrey C
Friesen, Geoffrey C
Associate Professor of Finance
Expertise:
  • Behavioral Finance
  • Financial Institutions
  • Financial Markets & Investing
  • Insurance
Finance
CoB 425 N
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-2334
Fax: (402) 472-5140
gfriesen2@unl.edu