The relationship between composition of inside directors’ compensation and firm’s future performance: The influence of uncertainty

Authors: Yi-Hui Tai; Chia-Ling Lee

Journal: Corporate Management Review. Dec. 2020, 40(2): 73-106

Keywords: Inside director, composition of compensation, firm performance, uncertainty

Abstract:
Inside directors are an important part of a top management team’s (TMT’s) composition and are members of a firm’s board of directors. The research focuses on the dual roles of inside director and the effect of the proportion of compensation for inside directors’ dual roles on firm performance when the firm faces a highly uncertain environment. This study tests the following empirical issues: (1) whether the proportion of inside directors’ compensation for their director roles is lower under a more uncertain environment; (2) according to the cronyism perspective, when the degree of uncertainty the firm faces is high, whether the proportion of inside directors’ compensation for their director roles has a negative influence on firm performance; and (3) whether the aforementioned issues are still supported when there is CEO duality. The empirical results show that the proportion of inside directors’ compensation for their director roles is lower in a more uncertain environment. Moreover, when the degree of uncertainty the firm faces is high, the proportion of inside directors’ compensation for their director roles does not negatively influence firm performance, but when there is CEO duality, this proportion does negatively influence firm performance.