Composition of the board of directors and pay-performance sensitivity

Abstract

This article investigates, in the Brazilian capital market, the effect of the composition of the board of directors on executive compensation sensitivity to market performance, known as pay-performance sensitivity (PPS). Due to potential agency conflicts between controlling and minority shareholders and between shareholders and managers, members of the board of directors of the executive board or those appointed by the controlling shareholder might have less independence, something which may compromise monitoring effectiveness and, consequently, reduce the PPS. The purpose is contributing to understand the agency conflicts that have taken place in the Brazilian capital market and to define the configuration of the monitoring and compensation mechanisms that minimize total agency costs, maximizing shareholders’ wealth. The research results have implications for understanding the agency relations and for corporate governance in the Brazilian capital market. It is concluded that the relation between the monitoring exercised by the board of directors and executive compensation is a condition for its effectiveness as a governance mechanism in the Brazilian capital market. Data within the period 2013-2015 from 92 companies that participate in the Brazil 100 Index (IBRX 100) of the São Paulo Stock, Mercantile & Futures Exchange (BM&FBOVESPA) were analyzed. In addition to tests of difference between mean values and correlation, estimates were processed through feasible generalized least squares modeling. The independence of the board of directors vis-à-vis the controlling shareholder and the executive board may work as a corporate governance mechanism supplementing executive compensation. The results of this study indicate that the proportion of executives and independent members in the board of directors reduces the PPS, a measurement for executive compensation effectiveness made operational by the contemporary relation between increased managers’ compensation and increased company’s market value.

Executive Compensation and Performance of Companies in the Brazilian Capital Market: Evidence of Negative Relationship with Focus on the Interests of the Controlling Shareholder

“…It is worth noting that, considering the nature of documentary research, the lack of data and the low quality of the disclosure imposed limitations on the analysis for the entire stock market. In this sense, executive compensation studies on the Brazilian capital market have undertaken analyses that consider the most representative companies based on their liquidity volumes and presence in stock market indices (Carvalho & Devidé Junior, 2012;Araújo & Ribeiro, 2017;Oliveira & Silva Junior, 2018;Konraht et al, 2018;Brandão et al, 2019), being relevant for corporate governance research because it comprises companies with greater visibility and market presence in Brazil (Crisóstomo & Brandão, 2020).…”

“…Thus, the models used in the study were proposed by the authors, based on previous studies (Young et al, 2008;Renders & Gaeremynck, 2012;Baixauli-Soler & Sanches-Marin, 2015;Konraht, 2018) to measure the sensitivity of performance and corporate value to the executive compensation package and other company characteristics, including variables that have been ignored, or have been poorly tested in studies on executive compensation in the Brazilian capital market (Aguiar & Pimentel, 2017;Souza et al, 2017;Brandão et al, 2019), such as degree of ownership concentration, degree of the presence of family members in the company, degree of majority voting rights shares, and the presence of dual share classes (voting and non-voting). All these company characteristics were considered to test the research hypothesis.…”

Boards of Directors in Brazil: Literature Review and Research Agenda

“…However, there are interesting results from studies that have been dealing with themes that need to be further explored. Regarding compensation, for example, the results of Brandão, Vasconcelos, Luca, and Crisóstomo (2019) indicate that the proportion of executives and independent members on boards reduces the pay-performance sensitivity (PPS), a measure of executive compensation effectiveness made operational by the relationship between increasing manager remuneration and increasing the company's market value. In terms of remuneration, Alves and Leal (2016) also found that more homogeneous and passive boards could grant higher remuneration.…”

Concentração Acionária, Conselho De Administração E Remuneração De Executivos

“…Some studies also take the proportion of members appointed by majority shareholders and of independent members on the BD into account. Unsurprisingly, greater BD independence has been shown to restrain managerial power and inhibit excessive remuneration (Brandão, Vasconcelos, Luca, & Crisóstomo, 2019;Choe, Tian, & Yin, 2014).…”

“…Such independence would be a moderating factor in both agent-principal and principal-principal conflicts (Brandão et al, 2019). An independent BD would limit the CEO's influence on remuneration policies and thereby avoid encumbering the firm with excessive compensation packages (Chhaochharia & Grinstein, 2009).…”