Fixed or Contingent: How Should “Governance Monitors” Be Paid? [PDF]
Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: October 2012
Corporate monitors are important participants in corporate governance systems. Monitors include the board of directors, the general counsel, and internal and external auditors. Monitors are paid by the organization but their responsibilities largely or mostly non-managerial.
How should monitors be paid? Because their objective is to detect and mitigate agency problems, one could argue that they should be paid almost entirely on a fixed-salary basis. On the other hand, an entirely fixed compensation system might not provide sufficient incentive to perform.
We discuss this issue in greater detail. We ask:
- Should corporate monitors be paid a bonus?
- If so, what form should it take?
- What performance targets should be used to calculate the bonus?
- Do performance incentives enhance or impede the effectiveness of monitors?
Read the Closer Look and let us know what you think!