Board Compensation and Firm Performance: The Role of 'Independent' Board Members

Abstract

This paper examines the link between firm performance, board structure and top executive pay. We use a panel of firms from the Portuguese Stock Market, where the institutional context differs markedly from the U.K. and U.S., but is very similar to most other European countries. The standard organizational structure is a single-tier board, which includes the CEO as well as executive and non-executive members. The results confirm a large effect of firm size on top executive compensation. However there is no relationship between the board remuneration and company performance. We examine whether the governance structure of companies is relevant in influencing top executive pay. Specifically, we consider the role of non-executive board members as mediators of the management and shareholders relationship. Our results suggest that firms with more non-executive board members pay higher wages to their executives. Furthermore, we find that firms with zero non-executive board members actually have less agency problems, and have a better alignment of shareholders' and managers' interests. These results cast some doubts on the effectiveness of independent board members incentive systems, and on their stated monitoring role.