Board Independence, Executive Pay Structures, and Pay Disclosure: Evidence from Europe

Using a broad sample of the largest European companies, I examine whether the two governance mechanisms, namely (i) independent monitoring by a board of directors and (ii) grants and disclosures of incentive-based executive pay, are substitutes for one another. I find that companies with proportionately more executives on their boards of directors grant greater incentive-based pay to their executives, and improve the transparency of their pay disclosure. The findings are consistent with the efficient contracting argument, which predicts that greater incentive-based pay and pay disclosure transparency mitigate agency problems generated by boards dependent upon management. * I am indebted to my advisors S.P. Kothari, Peter Wysocki, and Joe Weber for their guidance and interest. I thank Daron Acemoglu, Ana Albuquerque, Fabrizio Ferri, Paul Gompers, Ying Li, Garen Markarian, Yanfeng Xue, and Jieying Zhang for their helpful comments. All possible errors remain mine.