“Board independence” and compensation structure of directors

Elena Merino, Montserrat Manzaneque, Alba Maria Priego

DOI: http://dx.doi.org/10.12775/CJFA.2013.020


This paper examines the relationship between board independence and the level and structure of directors´ compensation to determine whether this “independence” exerts a moderating effect on the different systems of remuneration granted to directors. We have developed several models based on linear panel data regression. The sample included 76 listed companies on the Spanish Continuous Market for the period 2004–2009. The results reveal that the moderating effect of board independence on directors´ compensation depends on the type of remuneration, being especially significant in the case of variable remuneration but not for fixed remuneration. This is significant for the study context because the fixed remuneration is the most important retribution concept. The results of this paper reveals that the inefficient of the board as mechanisms of control on fixed remuneration could be translated into an insufficient control of wealth extraction from the shareholders by the management. Our results contribute to the existing debate on the appropriate norms of corporate governance control over the directors’ compensation. These results offer additional evidence about the impact of board independence over the structure of compensation granted to directors, issue shortly studied so far.


Director compensation; board compensation; board of directors; corporate governance; board characteristics; board independence

Full Text:



Adams R. B. & Mehran H. (2005), Corporate Performance, Board Structure and its determinants in the Banking Industry, available at: http://ssrn.com/abstract=302593 (access: 14.11.2011).

Alzaga I. (2012), Retribución de directivos y crisis económica, Editorial Aranzadi, Navarra.

Andreas J. M., Rapp M. S. & Wolff M. (2009), Determinants of Director Compensation in Two-Tier Systems: Evidence from German Panel Data, available at: http://ssrn.com/abstract=1486325 (access: 20.12.2012).

Andrés P., Azofra V. & López F. (2005), Corporate Boards in OECD Countries: size, composition, functioning and effectiveness. “Corporate Governance: An international Review”, 13 (2), 197–210.

Andrés P. & Vallelado E. (2008), Corporate Governance in banking: the role of board of directors, “Journal of Banking and Finance”, 32 (12), 2570–2580. http://dx.doi.org/10.1016/j.jbankfin.2008.05.008.

Angbazo L. & Narayanan R. (1997), Top Management Compensation and the structure of the Board of Directors in Commercial Banks. “European Finance Review”, 1, 239–259. http://dx.doi.org/10.1023/A:1009760306445.

Arellano M. & Bond S. (1991), Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. “Review of Economic Studies”, 58 (2), 277–297. http://dx.doi.org/10.2307/2297968.

Arrondo R., Fernández C. & Fernández E. (2008), Influencia de la estructura de gobierno corporativo sobre la remuneraciónn de los consejeros en el mercado español. “Información Comercial Española (ICE): Revista de Economía”, 844, 187–203.

Bebchuk L. A. & Fried J. (2004), Pay without performance, Harvard University Press, Cambridge.

Blundell R. & Bond, S. (1998), Initial conditions and moment restrictions in dynamic panel data models. “Journal of Econometrics”, 87 (1), 115–143. http://dx.doi.org/10.1016/S0304-4076(98)00009-8.

Boyd B. K. (1994), Board control and CEO compensation. “Strategic Management Journal”, 15 (5), 335–344. http://dx.doi.org/10.1002/smj.4250150502.

Boyd B. K. (1996), Determinants of US Outside director compensation. “Corporate Governance: An international Review”, 4 (4), 202–211. http://dx.doi.org/10.1111/j.1467-8683.1996.tb00149.x.

Brick I. E., Palmon O. & Wald J. K. (2006), CEO compensation, Director Compensation and Firm Performance: Evidence of cronyism?. “Journal of Corporate Finance”, 12 (3), 403–423. http://dx.doi.org/10.1016/j.jcorpfin.2005.08.005.

Bryan S., Hwang L. S, Klein A. & Lilien S. (2000), Compensation of outside Directors: An empirical analysis of economic determinants, available at: http://ssrn.com/abstract=244540 (retrieved 5.06.2012).

Canarella G. & Nouray M. M. (2008), Executive compensation and firm performance: adjustment dynamics, non-linearity and asymmetry. “Managerial and Decision Economics”, 29 (4), 293–315. http://dx.doi.org/10.1002/mde.1368.

Cheng S. & Firth M. (2005), Ownership, corporate governance and top management pay in Hong Kong. “Corporate Governance: An international Review”, 13 (2), 291–302. http://dx.doi.org/10.1111/j.1467-8683.2005.00423.x.

CNMV (Spanish Securities Markets Commission) (2006), Unified Good Governance Code. May. Madrid.

CNMV (Spanish Securities Markets Commission) (2009), Corporate Governance Annual Report, available at: http://www.cnmv.es/DocPortal/Publicaciones/ Informes/IAGC2009.pdf (retrieved 30.10.2011).

Coles J. W., Daniel N. & Naveen L. (2008), Boards: Does one size fit all?. “Journal of Management”, 27 (1), 23–50. http://dx.doi.org/10.2139/ssrn.665746.

Conyon M. J. & He L. (2008), Executive compensation and CEO equity incentives in China´s listed firms, available at: http://ssrn.com/abstract=1261911 (retrieved 15.06.2011). http://dx.doi.org/10.2139/ssrn.1261911.

Conyon M. J. & Peck S. I. (1998), Board control, remuneration committees, and top management compensation. “Academy of Management Journal”, 41 (2), 146–157. http://dx.doi.org/10.2307/257099.

Cordeiro J., Veliyath R. & Eramus E. J. (2000), An empirical investigation of the determinants of outside director compensation. “Corporate Governance: An International Review”, 8 (3), 268–279. http://dx.doi.org/10.1111/1467-8683.00204.

Davidson R., Goodwin-Stewart J. & Kent P. (2005), Internal governance structure and earnings management. “Accounting and Finance”, 45 (2), 241–267. http://dx.doi.org/10.1111/j.1467-629x.2004.00132.x.

Dávila A. & Peñalva F. (2004). Corporate governance and the weighting of performance measures in CEO compensation. “Review of Accounting Studies”, 11 (4), 463–493.

De Miguel A., Pindado J. & De la Torre C. (2004), Ownership structure and firm value: new evidence from Spain. “Strategic Management Journal”, 25 (12), 1199–1207. http://dx.doi.org/10.1002/smj.430.

Du Boys C. (2009), Is payout policy part of the corporate governance system? The case of France. “European Journal of International Management”, 3 (1), 42–59.

Duffhues, P. & Kabir, R. (2008). Is the Pay-Performance relationship always positive? Evidence from the Netherlands, available at: http://ssrn.com/abstract=962030 (access: 20.02.2011).

Elsas R. & Florysiak D. (2008), Empirical capital structure research: New ideas, recent evidence, and methodological issues. working paper (no. 2008–10), School of Management, Munich.

Fahlenbrach R. (2009). Shareholder rights, boards, and CEO compensation. “Review of Finance”, 13 (1), 811–113. http://dx.doi.org/10.1093/rof/rfn011.

Fernández A. I., Gómez S. & Fernández C. (1998), El papel supervisor del consejo de administración sobre la actuación gerencial. Evidencia para el caso español. “Investigaciones económicas”, 22, 501–516.

Ferrarini G., Moloney N. & Ungureanu M. C. (2010), Executive Remuneration in crisis: a critical assessment of reforms in Europe. “Journal of Corporate Law Studies”, 10 (1), 73–118.

Finkelstein S. & Hambrick D. C. (1989), Chief executive compensation: a study of the intersection of markets and political processes. “Strategic Management Journal”, 10 (2), 121–134. http://dx.doi.org/10.1002/smj.4250100203.

Heidrick & Struggles (2009), Boards in turbulent time. Corporate Governance Report. Heidrick & Struggles International Inc.

Heidrick & Struggles (2011), European Corporate Governance Report. Challenging board performance. available at: http://www.heidrick.com/PublicationsReports/ PublicationsReports/HS_EuropenCorpGovRpt2011.pdf (retrieved 3.01.2013).

Hermalin B. & Weisbach M. S. (2003), Board of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature. “Economic Policy Review”, 9 (1), 7–26.

Himmelberg C. P., Hubbard R. G. & Palia D. (1999), Understanding the determinants of managerial ownership and performance. “The Journal of Financial Economics”, 53 (3), 333–384. http://dx.doi.org/10.1016/S0304-405X(99)00025-2.

Lilling M. S. (2006), The link between CEO compensation and firm performance: does simultaneity matter?. “Atlantic Economic Journal“, 34 (1), 101–114. http://dx.doi.org/10.1007/s11293-006-6132-8.

Mayers D. & Smith C. W. (2010), Compensation and Board Structure. Evidence for the Insurance Industry. “The Journal of Risk and Insurance”, 77 (2), 297–327. http://dx.doi.org/10.1111/j.1539-6975.2010.01352.x.

Manzaneque M., Merino E. & Banegas R. (2011), Corporate governance issues and director compensation structure in Spanish companies. “African Journal of Business Management”, 5 (22), 9164–9179.

Merino E., Manzaneque M. & Banegas R. (2012), Control of Directors’ Compensation in Spanish Companies. Corporate Governance and Firm Performance, [in:] Studies in Management and Financial Accounting. Performance Measurement and Management Control: Global Issues, A. Davila, M. J. Epstein, J. F. Manzoni, (eds.), Emerald Group Publishing Ltd., United Kingdom, 391–425.

Spencer, S. (2010), Índice Spencer Stuart de Consejos de Administración” (14ª Edición).

Ryan H. E. & Wiggins R. A. (2004), Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. “Journal of Financial Economics”, 73, 497–524. http://dx.doi.org/10.1016/j.jfineco.2003.11.002.

Sánchez G. & Lucas M. E. (2008), El nivel retributivo de los altos directivos de las empresas cotizadas españolas: influencia del tamaño y composición del Consejo de Administración. “Boletín Económico del ICE”, 2938, 37–52.

Sulong Z. & Mat Nor F. (2010), Corporate Governance Mechanisms and Firm Valuation in Malaysian Listed Firms: A Panel Data Analysis. “Journal of Modern Accounting and Auditing”, 6 (1), 1–18.

Yermack D. (1996), Higher market valuation of companies with a small board of directors. “Journal of Financial Economics”, 40 (2), 185–211. http://dx.doi.org/10.1016/0304-405X(95)00844-5.

ISSN 2300-1240 (print)
ISSN 2300-3065 (online)

Partnerzy platformy czasopism