2001•The Journal of Financial ResearchRequires access

EXECUTIVE COMPENSATION STRUCTURE AND CORPORATE GOVERNANCE CHOICES

Keith Harvey, Ronald E. Shrieves

Abstract

Abstract Using data that reflect the significant growth in incentive compensation during the last decade, we extend research in this area by specifying a more complete model that addresses both corporate governance and risk‐sharing factors that theory suggests should influence compensation policy. We find that the extent of incentive compensation is systematically related to other features of corporate governance, as well as to factors affecting managerial risk aversion. The results support the following conclusions: (a) the presence of outside directors and blockholders facilitates the use of incentive compensation, (b) incentive compensation is inversely related to use of leverage, and (c) the incentive pay component of compensation is lower for CEOs near or at retirement age and is decreasing in the percentage of firm stock already owned by the CEO. JEL classification: G34

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Key concepts: Incentive, Executive compensation, Corporate governance, Leverage (statistics), Compensation (psychology), Stock options, Business, Risk aversion (psychology)