Board Independence, CEO Pay, and Camouflaged Compensation

We analyze how the reputational concerns of boards influence executive compensation and the use of hidden pay. Independent boards reduce disclosed pay to signal their independence, but are more likely to use inefficient hidden pay than manager-friendly boards. Stronger reputational pressures lead to lower disclosed pay and higher hidden pay, and policies that increase the transparency of executive compensation have the opposite effect. While reputational concerns can induce boards to choose compensation contracts more favorable to shareholders, there is a threshold beyond which stronger reputational concerns harm shareholders. Similarly, we derive conditions under which excessive pay transparency harms shareholders