Abstract
Integrating an economic perspective (agency theory) with a socio- psychological perspective (upper echelon theory), we examine how board of directors' power relates to pay-for-performance sensitivity (PPS) in low and high-performing firms by proposing and empirically examining a two-dimensional model of board power (prestige and structural) using board structural and composition characteristics as proxy power indicators. Using 5,730 directors’ data for 558 firms from 2000-2006, we conduct a multilevel analysis to estimate power scores at the director individual- level, and then examine board power dispersion or concentration at the board-level. We contribute to research by illustrating board power’s relationship to monitoring effectiveness is contextual based on board and firm characteristics: type of power, power concentration (dispersion), and firm performance. We find board concentrated prestige and concentrated structural power complement each other to impact monitoring effectiveness in high-performing firms.
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