Abstract
AbstractWe examine the impact of independent directors’ reputations on executive pay‐performance sensitivity. Using hand‐collected data from listed Chinese companies from 2012 to 2017, we find a positive association between independent directors’ reputations and pay‐performance sensitivity that is more pronounced in companies with less concentrated ownership. Further, the results show that reputable directors have a stronger influence on pay‐performance sensitivity when they sit on a remuneration committee, are in state‐owned enterprises, and are in companies with higher agency costs. Our results highlight the monitoring role of reputable independent directors in setting effective executive compensation contracts.
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