Do Shareholders Benefit from the Adoption of Incentive Pay for Directors?

Institutional Monitoring and REIT CEO Compensation

“…Finally, a major motivation of our study is its potential contribution to the growing controversy surrounding the broad issue of the need and relevance for 1 Gerety et al (2001) report that over the period of 1987 to 1998, 128 out of 289 firms in their sample have an independent nomination committee (CEO does not serve on the nomination committee). In general, CEO involvement in the selection of directors has reduced over the last twenty years.…”

Director Compensation and CEO Bargaining Power in REITs

“…This is worse than a nomination committee with CEO as a member because outside directors at least have the opportunity to negotiate. Consistent with this notion, Gerety et al (2001) report that the market reacts positively to the adoption of incentive plans for directors when the CEO is not involved in director selection. Shivdasani and Yermack (1999) find that market reacts negatively to outside director appointments when the CEO sits on the nomination committee.…”

“…The third group comprises firms with no nomination committees. Following Shivdasani and Yermack (1999) and Gerety et al (2001), we argue that firms with nomination committees where CEO is not a member are more likely to have an independent board aligned with shareholder interest. These directors are paid a greater share of equity-based compensation as an incentive for monitoring to improve performance.…”

“…These directors are less likely to be independent because they feel obligated to the CEO for continued service to enhance their reputation and human capital. Shivdasani and Yermack (1999) and Gerety et al (2001) demonstrate that when the CEO influences the director selection process through the nomination committee, the board of directors is less effective in monitoring. 3 Feng et al (2007) report that entrenched CEOs in firms without nomination committees pay relatively high dividends.…”

“…Some argue that real estate assets are easier to value because of their transparent and tangible asset structure (Hartzell et al 2006). Gerety et al (2001) define the value of a REIT as simply the aggregate (observable) market value of its holdings. Ghosh and Sirmans (2006) point to the limited human capital and growth options in REITs to make a similar point.…”