Abstract
Reputational concerns are arguably the single most powerful incentive for board directors to act in the interest of shareholders. We propose a model to investigate the impact of boards’ reputational concerns on the level and structure of executive compensation, the use of camouaged pay, and the relation between board independence and compensation decisions. We show that, in order to be perceived as independent, boards lower managers’ pay, but may also pay managers in hidden ways or structure compensation ineciently. Interestingly, independent boards, not manager-friendly boards, are more likely to make use of hidden compensation. We apply our model to study the costs and benets of greater pay transparency and of measures, such as say-on-pay initiatives, that
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