The Board of Directors and Executive Compensation in the Context of Crisis: A Comparative Study Between the United States and France

(ProQuest: . denotes formulae omitted.)I. INTRODUCTIONResearch on the role of the board as a governance mechanism has attracted the attention of researchers and professionals. The latest crisis has reactivated the debate on the effectiveness of this mechanism as a guarantee to protect the interests of shareholders (Ferrero-Ferrero et al. 2011). Given the importance of the remuneration of managers in the company, the main question is whether the board may have an important role in determining the level of compensation. Several empirical studies have examined the impact of board characteristics on the level of executive compensation such as Ramaswamy et al. (2000), Godard and Schatt (2004), Brick et al. (2006), Chhaochharia and Grinstein (2009), and Ozdemir and Upneja (2012). However, the results remain inconclusive due to the selected sample and the specificity that represents the board of directors in each country.In this analysis, we attempted to determine, the characteristics of the board that can affect the level of remuneration for two samples characterized by different governance systems (market-oriented system vs. mixed governance system). In addition, given the importance of the factor "financial crisis" on executive compensation (FerreroFerrero et al., 2011), we try to see if the manager takes advantage of this instability by excessive compensation.This study attempts to make a significant contribution to the existing literature: First, it shows a comparison between two samples belonging to two different systems of governance. Then, referring to the work of Gupta et al. (2009) and Ferrero-Ferrero et al. (2011) we integrate in our model a variable indicating the presence of the financial crisis to determine if the executive takes advantage of this period of instability. The investigations in terms of executive compensation during the periods of crisis are very limited. This study provides a contribution to the literature where we try to determine if the manager takes advantage of this period of instability. Finally, we determine whether the board of directors is effective during the period of financial crisis. According to Broye and Moulin (2012), board effectiveness is explained by the possibility of controlling the executive to receive compensation in excess of what would be justified.The rest of this paper is structured as follows. In Section II, we will present the research hypotheses about the relationship between board characteristics and the level of executive compensation. In Section III, we will determine the sample and the data sources. In Section IV, we will discuss the model and the variables selected. In Section V, we will interpret the results on the impact of the composition of the board on the remuneration received by the director. In Section VI, we will study the effectiveness of the board in determining the amount of managerial remuneration during the financial crisis. In Section VII, we will conclude the paper.II. THE RESEARCH HYPOTHESISA. Board SizeAccording to Bebchuk and Fried (2004), a large board size is characterized by a problem of internal coordination and communication problems between its members, which makes it inefficient. Therefore, the leader will have an important part in the determination of his compensation (Eisenberg et al., 1998). Core et al. (1999) find that executive compensation is higher when the board size is large. We will test the following hypothesis:H1: There is a positive relationship between the board size and the remuneration received by the manager.B. DualityAccording to Firth et al. (2007) when the chairman of the board of directors acts also as the company manager, the board's effectiveness in the supervision of the executive is weak. The duality can give to the manager excessive influence on the board and therefore compromises the ability of the latter to exercise adequate control over the executive compensation policy (Ryan and Wiggins, 2004). …