Fixed or Contingent: How Should 'Governance Monitors' Be Paid?

Abstract

Corporate monitors are important participants in corporate governance systems. Monitors include the board of directors, the general counsel, and internal and external auditors. Monitors are paid by the organization but their responsibilities largely or mostly non-managerial. How should monitors be paid? Because their objective is to detect and mitigate agency problems, one could argue that they should be paid almost entirely on a fixed-salary basis. On the other hand, an entirely fixed compensation system might not provide sufficient incentive to perform. We discuss this issue in greater detail. We ask: Should corporate monitors be paid a bonus? If so, what form should it take? What performance targets should be used to calculate the bonus? Do performance incentives enhance or impede the effectiveness of monitors? Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.