Today, most firms provide equity-based incentive compensation to their non-executive directors. We summarize viewpoints supportive and critical of the development. We argue that the effectiveness of incentive compensation is related to the structure of the incentive pay contact. We discuss the use of options and shares as well as the issue of whether incentive pay should be geared toward current rewards or future incentives. We also discuss the critical issue of maintaining the ownership exposure of directors by providing sufficient levles of equity as well as placing restictions on cashing out. Using our arguments aboce, we suggest guidelines for constructing an optimal contract. We compare 289 incentive plans offered by public companies in the US during 1988-1998 and find that plans deviate significantly from the optimum.

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This is the pre-print of an article published by Emerald Group Publishing Limited. © 2004 Emerald Group Publishing Limited. The final, published version is available here: https://doi.org/10.1108/14720700410547495

Note: imported from RIT’s Digital Media Library running on DSpace to RIT Scholar Works in February 2014.

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