The effect of independent directors' financial expertise on the use of private information in setting bank CEO bonuses

Abstract

PurposeThe purpose of this study is to examine whether independent directors' financial expertise affects the use of private information in setting bank chief executive officer (CEO) bonuses.Design/methodology/approachThe association between future firm performance and bank CEO bonuses is used to measure the incorporation of private information into bonuses. Both level and change specifications are employed to test the effect of independent directors' financial expertise on the use of private information in setting CEO bonuses.FindingsIt is found that future firm performance is more positively associated with bank CEO bonuses for banks with a higher proportion of financial experts among independent directors than for other banks. The findings suggest that independent directors with financial expertise can more effectively use private information in setting bank CEO bonuses.Originality/valueResearch on independent directors' role in the use of private information in setting compensation is valuable for understanding how corporate governance can enhance the efficiency of CEO compensation contracts. This study indicates that financial experts on the bank board play an important role in this regard.