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Remuneration, Retention, and Reputation Incentives for Outside Directors



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    • David Yermack is from Stern School of Business, New York University. I appreciate helpful comments from Lucian Bebchuk, Jay Hartzell, Anil Shivdasani, an anonymous referee, and seminar participants at the Deutsche Bundesbank, Federal Reserve Bank of New York, Free University of Berlin, Goethe University Frankfurt, New York University, and Texas Christian University.


I study incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Previous research has only shown these relations to apply under limited circumstances such as financial distress. Together these incentive mechanisms provide directors with wealth increases of approximately 11 cents per $1,000 rise in firm value. Although smaller than the performance sensitivities of CEOs, outside directors' incentives imply a change in wealth of about $285,000 for a 1 standard deviation (SD) change in typical firm performance. Cross-sectional patterns of director equity awards conform to agency and financial theories.