CEO bargaining power, outside director remuneration and board of director monitoring

Outside director compensation has garnered much attention and criticism, recently. Prior research on outside director compensation has focused on the use of equity as a mechanism to align shareholders and outside directors. These studies, however, ignore the different alignment properties that exist between stock grants and stock options, as evidenced by the literature on executive compensation. Additionally, not all research is supportive of equity (grants and/or options) as the proper mechanism by which to compensate outside directors and makes a compelling argument for the exclusive use of cash in outside director compensation. As such, this study was designed to investigate the alignment properties of the components of outside director compensation (cash, stock grants, and stock options).; Data used in the studies is archival and was collected from 116 firms that were identified (from 1997-2000) as first time adopters of an outside director equity compensation plan. The time period is significant because it marks the period after guidance from the National Association of Corporate Directors concerning director compensation (1997) and before enactment of the Sarbanes-Oxley Act. Using a sample of firms in the first year of plan adoption decreases the sample size, but eliminates endogeneity. All 116 firms are used in Paper 1, while the sample size for Papers 2 and 3 is 89. In those papers, 27 firms were eliminated because they did not have 5 years of additional financial information beyond the plan adoption date due to either mergers/acquisitions (23) or delisting of trading securities (4).; Paper 1 investigates the determinants of outside director compensation. Specifically, it investigates the role CEO bargaining power plays in the determination of the mix of compensation components. Results indicate that CEOs use their bargaining power, past performance (accounting and stock) and stature (tenure and CEO/chairman duality), to set compensation schemes. In particular, outside directors with high bargaining power CEOs receive more total compensation.; Papers 2 and 3 investigate the effect outside director compensation has on future firm activity. Paper 2 investigates the association between outside director compensation and the decision to pay dividends. Results indicate that the percentage of cash (stock option) compensation is significantly positively (negatively) associated with the dividend payout ratio. Paper 3 investigates the association between outside director compensation and future firm performance. Results indicate that as the percentage of cash compensation increases, future firm performance, as measured by the accounting metrics of return on assets and earnings per share, increases in years 3 and 5 after the plan adoption. Oppositely, as stock options increase as a percentage of total compensation, market related performance measures (market to book ratio, stock volatility, and stock returns) increase in years 3 and 5.; Collectively, this dissertation provides evidence on the determinants and alignment properties of outside director compensation. Each compensation component, cash, stock grants, and stock options, has it own, unique alignment properties. By focusing on these differences, this dissertation contributes to the literature on outside director compensation by providing a more comprehensive understanding of outside director compensation and its impact on shareholder-director alignment.