The Diversity Effect: Examining the Impact of Board Composition on the Balance of CEO Compensation Incentives

Increasing focus is being placed on the diversity of boards, and it is rapidly becoming an important element of corporate governance. Apart from supervising the management team and aligning the interests of managers with those of shareholders, diverse board members are also expected to bring varied knowledge, expertise, valuable resources, and different perspectives to the company. This study aims to explore how board diversity affects CEO compensation incentives based on the database comprising 8568 firm-year observations, including United States non-financial and non-utility companies from 2007 to 2016. This research finds that boards with various dimensions of diversity reduce the CEO equity incentives (such as vega of stocks and options and vega of options) and enhance the CEO inside debt incentives (the CEO relative leverage ratio). When investigating the association between specific components of the board diversity index and CEO compensation incentives, we found that it is not just gender diversity but also financial expertise diversity that has a positive link with CEO inside debt incentives.