Department of Finance


Date of this Version



Published in Journal of Corporate Finance 14 (2008), pp. 153-162; doi: 10.1016/j.jcorpfin.2008.02.004 ; and pp. 753–754; doi: 10.1016/j.jcorpfin.2008.09.013. Copyright © 2008 Elsevier B.V. Used by permission.
The first publication of this article in JCF omitted Tables 3 & 4 and contained errors in the paragraph following Equation (1) in section 3.2. These were addressed in an Erratum published in December 2008. The complete article in corrected form is presented here.


This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998-2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.