The Impact of Boards of Directors on Executive Compensation Systems under Environmental Jolts

We study the role of boards of directors in the US banking industry during deregulation. Specifically, we examine how the structural characteristics of corporate boards that influence board independence and group processes are related to changes in executive compensation that are designed to influence the behavior of key agents during the environmental jolt that deregulation creates. Our findings indicate that boards predominantly comprised of outside directors and smaller in size are more likely to adopt incentive-based compensation systems for the executives in the firms they govern. These findings are consistent with the premises of agency theory and support recent legislative initiatives designed to increase board independence. This study contributes to the corporate governance and executive compensation research streams and provides a useful foundation for future exploration into the influence that board structural characteristics (CEO duality, board composition and board size) have on governance activities and firm performance.