Board of discord: Conflicting preferences and performance pay

Board of discord: Conflicting preferences and performance pay

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AbstractThis study examines the interaction of conflicting preferences among directors, performance pay, and group effort.I model a corporate board in which directors voluntarily choose to research (or not research) an investment decision made by the board on behalf of the firm.Free-riding among directors creates a need for performance pay to motivate this costly research.The study CLARIFYING AND DENSIFYING SHAMPOO shows that board diversity, modeled as heterogeneous personal preferences among directors over the chosen investment, can act as a substitute for costly performance pay and, in equilibrium, benefit the firm.This creates a direct financial incentive for firms to increase board diversity.

The study then shows how the optimal level of diversity Headwear changes with board and firm characteristics and generates a set of testable empirical predictions.