Incentives For Monitors: Director Stock-Based Compensation And Firm Performance

Abstract

Since the mid-1990s, US corporations have increasingly emphasized stock-based compensation for outside directors in order to align their interests with stockholders and thus boost firm performance. We demonstrate that stock options and stock grants (each as a ratio relative to total compensation) for directors were positively related to future firm performance (measured as stock returns, and, separately, as Jensen’s Alpha) for a panel of 450 Standard and Poor 500 firms over 1995-97. Stock option ratios appeared to have a stronger impact on firm performance than stock grants did.