Board Compensation and Firm Performance: The Role of 'Independent' Board Members

38 Pages Posted: 2 Nov 2005

See all articles by Nuno Fernandes

Nuno Fernandes

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI)

Date Written: December 2005


This paper examines the link between firm performance, board structure and top executive pay. We use a panel of firms from the Portuguese Stock Market, where the institutional context differs markedly from the U.K. and U.S., but is very similar to most other European countries. The standard organizational structure is a single-tier board, which includes the CEO as well as executive and non-executive members. The results confirm a large effect of firm size on top executive compensation. However there is no relationship between the board remuneration and company performance. We examine whether the governance structure of companies is relevant in influencing top executive pay. Specifically, we consider the role of non-executive board members as mediators of the management and shareholders relationship. Our results suggest that firms with more non-executive board members pay higher wages to their executives. Furthermore, we find that firms with zero non-executive board members actually have less agency problems, and have a better alignment of shareholders' and managers' interests. These results cast some doubts on the effectiveness of independent board members incentive systems, and on their stated monitoring role.

Keywords: Executive Compensation, Corporate Governance, Independent Directors, Firm Performance

JEL Classification: G15, G30, G34

Suggested Citation

Fernandes, Nuno, Board Compensation and Firm Performance: The Role of 'Independent' Board Members (December 2005). ECGI - Finance Working Paper No. 104/2005, Available at SSRN: or

Nuno Fernandes (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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