Board Incentives and Executive Compensation: Evidence from Taiwan’s Electronic Industry

Abstract

This study examines the association between board-level incentive structures and executive compensation, focusing on director compensation as a key element of the corporate governance environment. Using panel data from publicly listed electronic firms in Taiwan from 2012 to 2024, we investigate how director compensation is associated with executive pay within firms over time. Drawing on agency theory, we argue that director compensation reflects the broader incentive climate faced by board members and may be associated with executive pay-setting processes. To examine this relationship, we employ panel data analysis to account for firm-specific characteristics and unobserved heterogeneity. The results reveal a robust positive relationship between director compensation and executive compensation, suggesting that higher board-level incentives are associated with higher executive pay. Furthermore, earnings-based performance measures play a more important role than equity-based measures in compensation design, highlighting the importance of accounting-based indicators in this context. This study contributes to the governance literature by demonstrating that director compensation is strongly associated with executive pay outcomes rather than merely a governance cost. The findings offer practical implications for compensation committee practices, incentive alignment, and organizational governance in emerging market contexts.

1. Introduction

Executive compensation plays a central role in corporate governance and incentive alignment. Agency theory predicts that compensation contracts link managerial pay to firm performance to mitigate conflicts of interest (Jensen & Meckling, 1976). However, a large body of empirical evidence documents persistent discrepancies between executive compensation and firm performance, raising concerns regarding managerial power and rent extraction (Bebchuk & Fried, 2004; Bebchuk & Grinstein, 2005).

These issues are particularly salient in capital-intensive and high-technology industries, where volatile earnings, large investments, and accounting noise complicate performance measurement. In such environments, compensation design depends not only on firm performance, but also on the governance context and incentive structures faced by boards (Adams & Ferreira, 2008).

While prior studies focus primarily on board structure and independence, relatively little attention has been paid to director compensation as a governance-related incentive. Directors are not passive monitors; their incentives may be associated with judgment, effort, and tolerance toward executive pay decisions. Empirical evidence suggests that director compensation and executive compensation often move together, reflecting shared incentive environments or mutual accommodation (Brick et al., 2006).

In addition, the choice of performance measures plays a critical role in compensation design. Earnings-based measures such as earnings per share (EPS) are widely used due to their transparency, while ratio-based measures such as return on equity (ROE) may be distorted by capital structure changes. These concerns are particularly important in electronic industries, where large equity bases and investment cycles can reduce the informativeness of ratio-based metrics.

Against this backdrop, this study examines the factors associated with executive compensation in Taiwan’s electronic industry. Using a balanced panel of 360 publicly listed electronic firms from 2012 to 2024, the analysis examines how director compensation and firm performance are associated with executive pay. We employ a two-way fixed effects framework to control for unobserved heterogeneity.

This study makes four primary contributions to the literature. First, it conceptualizes director compensation as an integral component of the board’s incentive environment, rather than a passive governance cost. Second, it provides novel panel evidence from Taiwan’s electronic industry, complementing the predominantly U.S.-centric literature. Third, the results show that EPS provides greater explanation power for executive compensation than ROE, highlighting the strategic importance of choosing industry-specific performance measures. Fourth, to address potential endogeneity and reverse causality concerns, this study employs a two-stage least squares (2SLS) instrumental variable approach using lagged director compensation as an instrument, thereby strengthening identification and supporting the robustness of the empirical results.

Overall, the findings highlight director compensation as an important governance-related factor associated with executive pay and underscore the importance of accounting for incentive environments in corporate governance research.

The remainder of this paper is organized as follows. Section 2 reviews the literature and develops the hypotheses. Section 3 describes the data and methodology. Section 4 presents the empirical results. Section 5 presents robustness checks and the instrumental variable (IV) estimation results. Section 6 discusses the implications, and Section 7 concludes.

2. Literature Review and Hypothesis Development

2.1. Executive Compensation Theories

The theoretical foundations of executive compensation primarily stem from agency theory, optimal contracting theory, and managerial power theory. Jensen and Meckling (1976) argue that compensation contracts serve as mechanisms to mitigate agency conflicts arising from the separation of ownership and control. Subsequent studies emphasize that performance measurement noise and risk-sharing considerations constrain the strength of pay–performance sensitivity (Holmström, 1979; Holmström & Tirole, 1993).

From an incentive-based perspective, executive compensation has also been interpreted through the lens of tournament theory, which posits that compensation differentials are designed to motivate competition and effort among managers. Empirical evidence from the United Kingdom supports this view, suggesting that executive pay structures may function as tournament-style incentive mechanisms rather than purely performance-based contracts (Conyon et al., 2001).

In contrast, managerial power theory contends that executives may influence compensation-setting processes, particularly when board oversight is weak (Bebchuk & Fried, 2004). Empirical evidence further shows that executive compensation has increased substantially over time, often outpacing changes in firm performance, raising concerns about the effectiveness of traditional pay–performance alignment mechanisms (Bebchuk & Grinstein, 2005). Together, these perspectives suggest that observed compensation outcomes may reflect governance frictions rather than purely efficient contracting.

In addition to governance-based explanations, alternative perspectives emphasize market-based factors in shaping executive compensation. Gabaix and Landier (2008) argue that the substantial growth in CEO compensation can be partially explained by increases in firm size and the competitive market for top managerial talent. Under this view, observed increases in executive pay may reflect equilibrium outcomes in the market for managerial skills rather than purely governance failures.

Taken together, the executive compensation literature highlights the coexistence of incentive alignment mechanisms, governance frictions, and managerial power in shaping observed pay outcomes. Comprehensive surveys emphasize that executive compensation reflects a combination of optimal contracting considerations and institutional and governance constraints (Edmans et al., 2017).

2.2. Director Incentives and Cronyism

A central concern in the executive compensation literature is the risk that boards may fail to provide effective oversight over executive pay due to managerial power and social connections between directors and executives. Rather than acting as independent monitors, directors may develop implicit alliances with top management, resulting in excessive compensation arrangements that are weakly linked to firm performance. Early empirical evidence of such mutual accommodation is provided by Brick et al. (2006), who document a strong co-movement between CEO compensation and director compensation, consistent with the presence of cronyism in pay-setting processes.

Early studies argue that cronyism emerges when directors lack sufficient incentives or independence to challenge management in compensation-setting processes. While traditional governance research emphasizes formal board independence and structural characteristics, more recent work highlights that directors’ own incentives are associated with their monitoring behavior (Adams & Ferreira, 2008). Directors are economic agents whose judgment, effort, and willingness to discipline executives depend on the costs and benefits associated with their governance role. As a result, compensation arrangements facing directors themselves may be associated with how rigorously executive pay contracts are reviewed.

Importantly, a distinction should be made between formal governance structures and the board’s incentive environment. Traditional governance mechanisms such as board independence, board size, ownership structure, and board committees establish the formal framework through which monitoring activities are conducted. In contrast, the board’s incentive environment reflects the economic incentives associated with directors’ willingness and motivation to perform their monitoring responsibilities. Consistent with agency theory, directors themselves can also be viewed as agents whose monitoring effectiveness depends on their incentive structures. Accordingly, director compensation may function as a distinct governance mechanism by shaping directors’ monitoring behavior and compensation-setting decisions.

Recent empirical evidence supports this incentive-based perspective. Research shows that boards composed of directors with diverse professional and international backgrounds are less susceptible to social ties and homogeneity with top executives, thereby exhibiting stronger oversight over executive compensation. Such diversity reduces the likelihood that directors implicitly endorse overly generous compensation contracts, enhancing the board’s monitoring effectiveness. These findings suggest that directors’ characteristics affect compensation outcomes primarily by shaping their incentives and reference points in governance decisions.

Beyond director characteristics, prior studies have documented an association between the structure of director compensation and the prevalence of cronyism. When directors’ own remuneration is explicitly linked to firm performance, they face stronger accountability to shareholders and have greater incentives to critically evaluate executive compensation proposals. Empirical studies demonstrate that performance-linked director compensation is associated with lower levels of excessive executive pay and a reduced likelihood of collusive behavior between directors and executives. This evidence indicates that director compensation functions not merely as a fixed governance cost, but as a mechanism that disciplines board behavior and constrains managerial power.

Taken together, the literature suggests that cronyism in executive compensation is not solely a function of weak formal governance structures, but rather reflects the broader incentive environment in which directors operate. Directors who face limited accountability or weak incentive alignment may be more tolerant of high executive compensation, whereas stronger director incentives can mitigate such tendencies. However, existing studies predominantly focus on whether director incentives are tied to performance or on specific director attributes, providing limited direct evidence on how the level of director compensation itself relates to executive pay outcomes. This study builds on the incentive-based view by examining director compensation as an integral component of the board’s incentive environment and exploring its association with executive compensation within firms over time.

2.3. Director Compensation Literature

Recent studies further suggest that boards’ ability to effectively constrain excessive CEO compensation depends not only on formal board independence, but also on directors’ background characteristics and incentive structures. Using a cross-country sample, Harymawan et al. (2023) document that boards with greater international experience or more diversified professional backgrounds are more effective in mitigating excessive CEO pay. Their findings indicate that director diversity helps reduce social ties and homogeneity between directors and top executives, thereby limiting directors’ tolerance for overly generous compensation contracts and strengthening the board’s monitoring role in pay-setting decisions. Cai et al. (2022) provide evidence that boards play an active role in shaping executive incentive contracts beyond formal governance structures. Laddin et al. (2023) documents a sustained increase in director compensation, reflecting expanded board responsibilities, heightened monitoring demands, and greater exposure to legal and reputational risk.

From the perspective of incentive design, Elsayed et al. (2021) provide important empirical evidence related to the phenomenon of managerial cronyism. Examining the structure of director compensation, they show that when directors’ own remuneration is more explicitly linked to firm performance, directors exhibit greater objectivity and discipline in evaluating executive compensation contracts. Such incentive alignment significantly reduces the likelihood of collusive behavior between directors and executives in compensation-setting processes. This evidence suggests that director compensation should not be viewed merely as a governance cost, but rather as an important incentive mechanism associated with the quality of compensation oversight.

Overall, the recent literature converges on the view that the effectiveness of boards in restraining excessive executive compensation critically depends on the incentive environment and governance context faced by directors themselves. However, existing studies largely focus on directors’ individual characteristics or on whether director compensation is performance-linked, while providing limited direct evidence on whether the level of director compensation is systematically associated with executive pay outcomes. Building on this literature, the present study explicitly examines director compensation as an integral component of the board’s incentive environment and investigates how it is associated with the structure and level of executive compensation.

Building on recent evidence that directors’ backgrounds and incentive structures play an important role in constraining excessive executive pay (Elsayed et al., 2021; Harymawan et al., 2023), this study argues that director compensation reflects the board’s overall incentive environment. Higher levels of director compensation may be associated with directors’ norms, reference points, and tolerance toward executive pay outcomes. This association may contribute to the observed co-movement between director compensation and executive compensation. Using firm-level panel data, Pathak et al. (2026) further show that governance-related factors, including board composition and incentive structures, are systematically associated with executive compensation outcomes after controlling for firm-specific factors.

Practitioner surveys similarly report rising director pay levels in recent years, particularly among large and complex firms, as boards face increasing governance and monitoring challenges (Willis Towers Watson, 2023).

2.4. Performance Measures Literature

These considerations regarding performance metric choice are particularly relevant in capital-intensive and high-technology manufacturing industries. Firms operating in electronic industries are characterized by large fixed investments, substantial depreciation, and frequent equity adjustments, which may weaken the informativeness of ratio-based performance measures such as return on equity (ROE). In contrast, earnings-based indicators such as earnings per share (EPS) provide more observable and interpretable signals of firm performance, making them more suitable inputs for executive compensation design in such environments.

A central premise of executive compensation theory is that managerial pay should be aligned with firm performance in order to mitigate agency problems and incentivize value-enhancing behavior. Efendi et al. (2021) show that accounting-based performance measures with higher interpretability play a central role in executive compensation design. At the same time, prior studies emphasize that the effectiveness of performance-based compensation depends critically on the specific choice of performance measures embedded in compensation contracts. Performance metrics differ in their observability, susceptibility to noise, and ability to isolate managerial effort from external or structural influences. Consequently, compensation committees face strategic decisions regarding which indicators best support incentive alignment. Komolafe (2024) also suggest that executive compensation responds unevenly to different accounting performance indicators, with earnings-based measures generally exhibiting stronger explanatory power than ratio-based metrics across various institutional settings.

According to Urcan and Yoon (2023), the inclusion of accounting metrics in executive contracts is contingent upon their inherent contractual properties. They argue that the varying degrees of sensitivity to executive decisions and susceptibility to external noise determine whether a specific performance measure can effectively align managerial incentives.

Accounting-based performance measures have long played a central role in executive compensation contracts. Among these measures, earnings per share (EPS) is widely adopted due to its transparency, standardized reporting, and ease of communication to investors and stakeholders. In contrast, ratio-based indicators such as return on equity (ROE) are calculated relative to the equity base and may be mechanically affected by changes in capital structure, equity issuance, share repurchases, or accounting adjustments. As a result, ROE may provide a noisier signal of managerial performance, particularly in firms with large and fluctuating equity bases.

Recent empirical evidence further indicates that the relative usefulness of performance measures varies systematically across industries and institutional settings. In capital-intensive industries, large-scale investments and substantial depreciation expenses can significantly distort balance-sheet-based ratios, reducing their capacity to serve as reliable indicators of managerial performance. In such environments, earnings-based measures are more likely to capture residual cash flows available to shareholders after accounting for capital costs, making them more informative inputs for compensation design (Kuo et al., 2022). Studies focusing on Asian high-technology firms further show that, despite growing attention to non-financial and ESG-related indicators, accounting earnings remain the most critical “hard” performance measures in executive compensation contracts within capital-intensive sectors (Kuo et al., 2022).

Uncertainty associated with technology-intensive industries further amplifies these considerations. Firms operating in environments characterized by rapid innovation, volatile investment cycles, and frequent equity adjustments face heightened challenges in designing effective incentive schemes. Under such conditions, ratio-based metrics may be particularly sensitive to capital structure changes that are only weakly related to managerial actions. Recent studies confirm that, in the presence of high technological uncertainty, compensation committees tend to rely more heavily on EPS rather than ROE to avoid interference from equity fluctuations and to maintain more stable managerial incentives (Zhang & Wang, 2024).

Taken together, the literature suggests that the choice of performance measures in executive compensation varies with industry characteristics, investment intensity, and environmental uncertainty. In capital-intensive and high-technology industries, earnings-based measures such as earnings per share (EPS) are expected to provide more informative and stable performance signals than equity-based ratios such as return on equity (ROE). Accordingly, this study examines whether EPS exhibits stronger explanatory power for executive compensation than ROE.

2.5. Hypothesis Development

2.5.1. Director Compensation and Executive Compensation

The literature on executive compensation increasingly recognizes that boards’ oversight effectiveness depends not only on formal governance structures, but also on the incentive environment faced by directors themselves. Prior research on managerial power and cronyism suggests that directors may develop implicit tolerance toward generous executive compensation when governance pressures are weak or when social ties between directors and executives are strong. Under such circumstances, compensation outcomes may reflect mutual accommodation rather than optimal contracting (Brick et al., 2006).

Recent studies further suggest that directors’ incentives and backgrounds may be associated with their judgment in compensation-setting processes. Directors with stronger accountability, diversified experience, or performance-sensitive incentives tend to exhibit greater discipline in reviewing executive pay contracts, whereas weaker incentive alignment may increase tolerance toward elevated executive compensation. These findings imply that director compensation is not merely a fixed governance cost, but an integral element of the board’s incentive system that is associated with norms, reference points, and oversight rigor in pay decisions.

Building on this incentive-based view, the present study conceptualizes director compensation as a proxy for the board’s overall incentive environment. Changes in director compensation levels may alter directors’ perceptions of appropriate pay benchmarks and their willingness to challenge managerial proposals, leading to systematic co-movement between director and executive compensation within firms over time. Rather than focusing solely on whether director compensation is explicitly linked to performance, this study examines whether the level of director compensation itself is associated with executive pay outcomes.

Accordingly, the first hypothesis is proposed as follows:

H1. 

Director compensation is positively associated with executive compensation.

2.5.2. Performance Measures and Executive Compensation

A central objective of executive compensation contracts is to align managerial incentives with firm performance. However, prior research emphasizes that the effectiveness of performance-based compensation depends critically on the choice of performance measures. Performance indicators vary in their ability to reflect managerial effort, as well as in their susceptibility to accounting noise, capital structure effects, and external shocks. As a result, compensation committees must select metrics that balance incentive alignment with interpretability and stability.

Accounting-based earnings measures, particularly earnings per share (EPS), are widely used in executive compensation contracts due to their transparency and standardized reporting. In contrast, return on equity (ROE) is a ratio-based measure that is mechanically influenced by changes in equity, capital injections, depreciation, and share repurchases. These features may reduce ROE’s usefulness as a performance signal, especially in capital-intensive industries where equity bases and investment cycles fluctuate substantially.

Recent empirical evidence suggests that these concerns are particularly salient in high-technology and capital-intensive industries. In such settings, earnings-based measures provide clearer signals of residual performance after accounting for heavy depreciation and investment expenditures, while ROE may be distorted by balance-sheet effects unrelated to managerial effort. Moreover, under conditions of high technological uncertainty, compensation committees tend to favor performance measures that reduce incentive distortion arising from equity adjustments and capital structure changes.

Taken together, the literature implies that different performance measures exhibit varying explanatory power for executive compensation, depending on industry characteristics and uncertainty. In capital-intensive and high-technology industries, earnings-based indicators are expected to play a more prominent role in executive pay determination than equity-based ratios. Based on this reasoning, the second hypothesis is formulated as follows:

H2. 

Earnings per share (EPS) exhibits stronger explanatory power for executive compensation than return on equity (ROE).

3. Data and Methodology

3.1. Sample and Data Sources

The sample construction proceeds in several steps. We begin by identifying all publicly listed firms classified under the electronic industry according to the Taiwan Economic Journal (TEJ) industry classification system. This initial screening yields 444 electronic firms over the period 2012–2024.

To ensure consistency in panel estimation and to facilitate the identification of within-firm compensation dynamics, firms with incomplete observations during the sample period are excluded. Specifically, firms with missing key variables or discontinuous financial and governance data are removed. After this screening, the final sample consists of 360 electronic firms with complete annual observations, yielding a balanced panel of firm–year observations spanning 13 years.

The electronic industry provides an appropriate empirical setting for examining factors associated with executive compensation because firms in this industry are characterized by high capital intensity, substantial research and development expenditures, and pronounced technological uncertainty. Semiconductor firms constitute the core segment of Taiwan’s electronic industry due to their large-scale investment requirements and exposure to rapid technological change. Nevertheless, many of the governance and incentive challenges faced by semiconductor firms extend more broadly across electronic manufacturing firms. Accordingly, while semiconductor firms play a central role within the industry, the analysis is conducted at the electronic-industry level to enhance the generalizability of the findings.

Data on executive compensation, director compensation, financial performance, ownership structure, and other firm-level characteristics are obtained from the Taiwan Economic Journal (TEJ) database and firms’ publicly available annual reports. All monetary variables are adjusted to maintain comparability across firms and years. The use of a balanced panel allows us to implement a two-way fixed effects framework, controlling for unobserved firm-specific characteristics and common macroeconomic shocks over time.

To reduce the influence of extreme observations commonly observed in compensation and financial variables, all continuous variables were winsorized at the 1st and 99th percentiles prior to model estimation. The winsorization procedure affected approximately 2% of observations for each continuous variable and was applied to MANAGER_PAY, BOARD_PAY, EPS, ROE, SIZE, R_D, CAP_INT, LEVERAGE, BOARD_HOLD, and MANAGER_HOLD.

3.2. Measurement of Variables

Executive compensation is measured as the total cash-based compensation paid to top executives. Director compensation captures total payments made to board members. Firm profitability is measured using EPS and ROE. Control variables include firm size, R&D intensity, leverage, capital intensity, ownership structure, and audit quality.

3.3. Empirical Model

To mitigate concerns of omitted variable bias and unobserved heterogeneity, this study employs panel data regression models with firm- and year-level fixed effects. The panel setting allows us to control for time-invariant firm-specific characteristics and common macroeconomic shocks over time, thereby improving the identification of within-firm variations in compensation decisions, consistent with standard panel data methodologies (Gujarati & Porter, 2009).

The baseline empirical specification is as follows:

$$\begin{array}{l}{\mathit{M}\mathit{A}\mathit{N}\mathit{A}\mathit{G}\mathit{E}\mathit{R}\_\mathit{P}\mathit{A}\mathit{Y}}_{it}\\ =\alpha +{\beta }_1{BOARD\_PAY}_{it}+{\beta }_2{EPS}_{it}+{\beta }_3{ROE}_{it}+{\beta }_4{SIZE}_{it}\\ +{\beta }_5{R\_D}_{it}+{\mu }_i+{\lambda }_t+{\epsilon }_{it}\end{array}$$

(1)

where $i$ indexes firms and $t$ indexes years; ${\mu }_i$ denotes firm fixed effects that capture time-invariant firm-specific characteristics, such as organizational culture, long-term governance orientation, and managerial style; ${\lambda }_t$ represents year fixed effects that account for macroeconomic conditions, regulatory changes, and industry-wide shocks affecting all firms in a given year; ${\epsilon }_{it}$ is the idiosyncratic error term.

The dependent variable, ${\mathrm{MANAGER}\_\mathrm{PAY}}_{it}$, measures the total compensation paid to top executives. The key independent variable, ${\mathrm{BOARD}\_\mathrm{PAY}}_{it}$, captures the total compensation received by board members and reflects the incentive structure of the board and the compensation committee.

Firm profitability is measured using both earnings per share (EPS) and return on equity (ROE) to assess whether different accounting-based performance metrics exhibit differential explanatory power in executive pay determination. Firm size and R&D intensity are included as standard control variables commonly used in the executive compensation literature.

To assess the robustness of the main results, the empirical model is extended by incorporating additional controls related to financial structure and corporate governance characteristics:

$$\begin{array}{l}{MANAGER\_PAY}_{it}\\ =\alpha +{\beta }_1{BOARD\_PAY}_{it}+{\beta }_2{EPS}_{it}+{\beta }_3{ROE}_{it}+{\beta }_4{SIZE}_{it}\\ +{\beta }_5{R\_D}_{it}\\ +{\beta }_6{CAP\_INT}_{it}+{\beta }_7{LEVERAGE}_{it}+{\beta }_8{BOARD\_HOLD}_{it}\\ +{\beta }_9{MANAGER\_HOLD}_{it}+{\beta }_{10}{BIG\_4}_{it}+{\mu }_i+{\lambda }_t+{\epsilon }_{it}\end{array}$$

(2)

The adoption of a two-way fixed effects framework mitigates concerns related to time-invariant unobserved firm heterogeneity while controlling for macroeconomic conditions, regulatory changes, and industry-wide shocks common to all firms. As a result, the estimated coefficients predominantly capture within-firm variations in compensation decisions over time rather than cross-sectional differences across firms.

These additional variables control for differences in firms’ capital intensity, leverage, ownership structure, managerial equity incentives, and audit quality, which may be associated with compensation policies.

Table 1. Variable Definitions.

Variable Type	Variable Name	Symbol	Definition and Measurement
Dependent Variable	Executive Compensation	MANAGER_PAY	The total amount of salary, bonus, and other forms of compensation paid to top executives in a given fiscal year, measuring the overall level of executive compensation.
Main Independent Variables	Board Compensation	BOARD_PAY	The total compensation paid to members of the board of directors in a given fiscal year, used to capture the incentive structure of the board and the compensation committee.
	Profitability	EPS	Earnings per share, measuring the firm’s current profitability and reflecting short-term earnings performance.
		ROE	Return on equity, calculated as net income divided by shareholders’ equity, measuring the efficiency of capital utilization.
Control Variables	Firm Size	SIZE	The natural logarithm of total assets, used to control for the effect of firm size on compensation levels.
	R&D expense	R_D	Research and development expenditures divided by operating revenue, reflecting the firm’s research and development intensity.
Robustness Test Variables	Capital Intensity	CAP_INT	A proxy for differences in firms’ operational technology and asset structure, controlling for variations in production modes and investment intensity that may affect executive compensation.
	Leverage	LEVERAGE	Total liabilities divided by total assets, controlling for the firm’s financial structure and risk exposure.
	Board Ownership	BOARD_HOLD	The ratio of shares held by board members to total shares outstanding, measuring the alignment of interests between directors and shareholders.
	Managerial Ownership	MANAGER_HOLD	The ratio of shares held by executives to total shares outstanding, controlling for incentive-alignment effects.
	Audit Quality	BIG_4	A dummy variable equal to 1 if the firm’s financial statements are audited by one of the Big Four accounting firms, and 0 otherwise, used as a proxy for audit quality.

summarizes the definitions and measurements of all variables used in the empirical analysis.

All regressions are estimated using ordinary least squares with firm-clustered standard errors to account for potential serial correlation and heteroskedasticity within-firms over time. This empirical design ensures that the estimated coefficients capture within-firm compensation dynamics rather than cross-sectional differences across firms.

Table 2. Descriptive statistics.

	Mean	Median	Maximum	Minimum	Std. Dev.
MANAGER_PAY	54,560.32	23,509.00	619,019.7	5886.900	95,791.36
BOARD_PAY	16,006.43	7204.500	173,473.1	992.7000	26,988.44
ROE	8.037109	7.735000	40.19680	−7.4110	9.998674
EPS	3.454661	1.920000	34.22690	−0.9100	5.498936
SIZE	16.12366	15.84922	20.16238	14.46120	1.392054
R_D	0.059785	0.035677	0.345885	0.003510	0.071793
CAP_INT	0.223699	0.198715	0.642214	0.053875	0.141218
LEVERAGE	0.427323	0.417580	0.809650	0.197202	0.158861
BOARD_HOLD	0.192921	0.147125	0.669713	0.055277	0.136218
MANAGER_HOLD	1.237943	0.360000	12.95350	0.010000	2.291083
BIG_4	0.945085	1.000000	1.000000	0.000000	0.227838

Notes: All continuous variables are winsorized at the 1st and 99th percentiles to reduce the influence of extreme observations.

presents descriptive statistics for the main variables used in the empirical analysis. The sample consists of a balanced panel of 4680 firm–year observations drawn from 360 electronic firms listed in Taiwan over the period 2012–2024.

Executive compensation (MANAGER_PAY) has a mean of NT$54,560.32 thousand and a median of NT$23,509.00 thousand, suggesting a right-skewed distribution of executive pay. Director compensation (BOARD_PAY) also exhibits substantial variation, with a mean value of NT$16,006.43 thousand and a median value of NT$7204.50 thousand. The distribution of both compensation variables indicates considerable heterogeneity across firms.

Regarding firm performance, EPS has a mean value of 3.455 and a median value of 1.920, while ROE has a mean of 8.037 and a median of 7.735. Compared with ROE, EPS exhibits a stronger association with executive compensation in subsequent analyses. Firm size (SIZE) shows moderate variation, whereas R_D, CAP_INT, LEVERAGE, BOARD_HOLD, and MANAGER_HOLD exhibit substantial cross-sectional differences. The mean value of BIG_4 is 0.945, indicating that most sample firms are audited by Big Four accounting firms.

3.4. Correlation Analysis

Table 3. Correlation matrix.

	MANAGER_PAY	BOARD_PAY	ROE	EPS	SIZE	R_D	CAP_INT	LEVERAGE	BOARD_HOLD	MANAGER_HOLD	BIG_4
MANAGER_PAY	1
BOARD_PAY	0.5995	1
ROE	0.2669	0.3741	1
EPS	0.3916	0.5021	0.6646	1
SIZE	0.6798	0.6045	0.2572	0.4142	1
R_D	−0.0367	−0.0799	−0.1087	−0.0293	−0.1703	1
CAP_INT	−0.0468	0.01	−0.1811	−0.1461	0.0881	−0.1167	1
LEVERAGE	0.2118	0.1392	0.0274	−0.0254	0.3245	−0.2815	−0.0077	1
BOARD_HOLD	−0.2124	−0.1886	−0.0203	−0.1076	−0.2278	0.0551	0.0547	−0.0468	1
MANAGER_HOLD	−0.0304	−0.0695	0.0599	0.0526	−0.1652	0.0052	−0.0692	−0.0243	0.0619	1
BIG_4	0.0846	0.073	0.0787	0.091	0.097	0.0611	−0.0237	−0.0635	−0.0246	−0.0065	1

Notes: All continuous variables are winsorized at the 1st and 99th percentiles. The highest pairwise correlation coefficient among the explanatory variables is 0.6646, which is below the conventional threshold of 0.80, suggesting that multicollinearity is unlikely to be a serious concern.

reports the Pearson correlation matrix. The correlation between BOARD_PAY and MANAGER_PAY is positive (0.5995), suggesting that firms with higher director compensation tend to provide higher executive compensation. EPS is positively associated with executive compensation (0.3916), whereas ROE exhibits a weaker positive correlation (0.2669). These findings provide preliminary support for the argument that earnings-based performance measures may be more closely related to executive compensation decisions than equity-based measures.

The highest pairwise correlation coefficient among the explanatory variables is 0.6646, occurring between EPS and ROE. Since this value is below the conventional threshold of 0.80, multicollinearity is unlikely to be a serious concern.

To further assess multicollinearity, variance inflation factor (VIF) diagnostics were conducted for all explanatory variables. The maximum VIF value is 2.253 and the mean VIF value is 1.460, both of which are well below the commonly accepted threshold of 10. These results confirm that multicollinearity does not pose a concern in the subsequent regression analysis. Overall, the correlation analysis and VIF diagnostics support the suitability of the model specification for the fixed-effects estimations reported in the following section.

Correlations among the explanatory variables themselves are generally modest. Firm size (SIZE) shows limited correlation with both performance measures and compensation variables, while research and development intensity (R_D) displays weak associations with most variables. Capital intensity (CAP_INT) and leverage (LEVERAGE) are moderately correlated with EPS and SIZE, but their magnitudes remain well below levels that would indicate problematic multicollinearity. Ownership variables (BOARD_HOLD and MANAGER_HOLD) and audit quality (BIG_4) exhibit relatively low correlations with the main compensation and performance variables.

To further assess multicollinearity, variance inflation factor (VIF) diagnostics were conducted for all explanatory variables. The VIF values are well below commonly accepted thresholds, confirming that multicollinearity does not pose a concern in the subsequent regression analysis. Overall, the correlation analysis supports the suitability of the model specification for the fixed effects estimations reported in the following section.

4. Empirical Results

Main Regression Results

Table 4. Baseline and Fixed Effects Regression Results.

Dependent Variable: MANAGER_PAY
	(1) Baseline	(2) Two-Way FE	(3) Robust Specification
C	−534,207.6 ***	−169,214.1 ***	−170,531.1 ***
	(−37.5580)	(−5.0919)	(−4.9991)
BOARD_PAY	0.9748 ***	0.5425 ***	0.5424 ***
	(20.2699)	(11.7175)	(11.6934)
ROE	196.8137	144.0327	120.4943
	(1.5040)	(1.3953)	(1.1448)
EPS	554.2929 **	3260.08 ***	3279.91 ***
	(2.1513)	(13.7079)	(13.6836)
SIZE	34,960.53 ***	12,677.18 ***	12,643.48 ***
	(38.9863)	(6.1326)	(5.7795)
R_D	9974.7 ***	−28,975.75 *	−27,285.78
	(7.2570)	(−1.6933)	(−1.5841)
CAP_INT	—	—	−9591.56
	—	—	(−0.9560)
LEVERAGE	—	—	3259.64
	—	—	(0.4246)
BOARD_HOLD	—	—	1109.48
	—	—	(0.1219)
MANAGER_HOLD	—	—	930.05 **
	—	—	(2.2681)
BIG_4	—	—	1343.441
	—	—	(0.2393)
Control	No	No	Yes
Firm FE	No	Yes	Yes
Year FE	No	Yes	Yes
N	4680	4680	4680
Adj-R2	0.5247	0.8610	0.8610
F (p-value)	1034.05 (0)	78.0533 (0)	77.0735 (0)

Notes: t-statistics are reported in parentheses. * p < 0.1, ** p < 0.05, *** p < 0.01. All continuous variables are winsorized at the 1st and 99th percentiles.

reports the main regression results. Column (1) presents the baseline pooled OLS specification, while Columns (2) and (3) incorporate firm and year fixed effects. Column (3) further includes additional control variables related to firms’ financial structure and corporate governance characteristics. Overall, the results are highly consistent across specifications, suggesting that the relationship between board compensation and executive compensation is stable and robust.

In the baseline model, BOARD_PAY is positively and highly significantly associated with MANAGER_PAY (β = 0.975, p < 0.01), indicating that firms with higher board compensation tend to provide higher executive compensation. This result provides initial support for Hypothesis 1.

Regarding firm performance, EPS exhibits a positive and statistically significant relationship with executive compensation, whereas ROE remains statistically insignificant. These findings suggest that earnings-based performance measures are more closely associated with executive compensation decisions than equity-based measures.

Firm size (SIZE) and R_D are positively and significantly related to executive compensation in the baseline model, indicating that larger firms and firms with greater innovation intensity tend to offer higher compensation levels. Overall, the baseline results reveal a strong positive association between board compensation and executive compensation, highlighting the importance of board-level incentives in compensation design.

Firm size (SIZE) continues to exhibit a positive and significant association with executive compensation, although the magnitude of the coefficient is reduced compared with the baseline model. This result indicates that larger firms tend to provide higher executive compensation, even after controlling for time-invariant firm characteristics. By contrast, the explanatory power of R&D intensity becomes weaker after fixed effects are introduced, suggesting that part of its effect is attributable to differences across firms rather than changes within firms over time.

Column (3) further incorporates additional controls related to financial structure and corporate governance. The coefficient on BOARD_PAY remains positive and highly significant, with a magnitude nearly identical to that reported in Column (2), confirming the robustness of the main finding. EPS also remains strongly positive and significant, whereas ROE continues to be insignificant. Among the additional control variables, only MANAGER_HOLD exhibits a positive and statistically significant effect on executive compensation, while CAP_INT, LEVERAGE, BOARD_HOLD, and BIG_4 do not display significant associations.

Overall, the fixed effects results demonstrate that executive compensation is primarily associated with board-level incentives and earnings-based performance measures. The stability of the BOARD_PAY coefficient across specifications reinforces the conclusion that director compensation constitutes an important component of the governance environment associated with executive pay decisions.

5. Robustness Checks

To examine whether the main results are robust, this study re-estimates the regression models using winsorized variables and additional control variables related to firms’ financial structure and corporate governance. The results are reported in Column (3) of Table 4 and

Table 5. Fixed-Effects Two-Stage Least Squares (FE-2SLS) Estimation Results.

Variables	(First-Stage) BOARD_PAY	(Second-Stage) MANAGER_PAY
C	−26,511.13 **	−158,092.40 ***
	(−2.4373)	(−3.9437)
LAG_BOARD_PAY	0.4063 ***	—
	(30.4316)
BOARD_PAY	—	0.8509 ***
		(7.0674)
ROE	361.2293 ***	13.4905
	(11.2572)	(0.1091)
EPS	854.08 ***	2769.16 ***
	(11.9074)	(9.5227)
SIZE	2140.33 ***	11,652.89 ***
	(3.0623)	(4.4928)
R_D	3393.06	−23,300.45
	(0.7415)	(−1.2107)
CAP_INT	−5286.02 *	−6190.76
	(−1.6899)	(−0.5546)
LEVERAGE	−4902.43 *	4610.17
	(−2.0354)	(0.5333)
BOARD_HOLD	−2199.64	3232.62
	(−0.7467)	(0.3063)
MANAGER_HOLD	−116.51	1135.85 **
	(−0.8840)	(2.4366)
BIG_4	−211.86	480.94
	(−0.1192)	(0.0750)
Observations	4320	4320
Adjusted R2	0.8594	0.8666
First-Stage F-statistic	70.4474 ***	—
Overall F-statistic	—	74.7091 ***

Notes: BOARD_PAY is treated as an endogenous variable and instrumented by LAG_BOARD_PAY. t statistics in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01, All continuous variables are winsorized at the 1st and 99th percentiles.

. All continuous variables are winsorized at the 1st and 99th percentiles to reduce the influence of extreme observations.

The overall results remain highly consistent with the main findings. BOARD_PAY continues to exhibit a positive and highly significant relationship with executive compensation across all specifications. The magnitude and significance of the coefficient remain stable after controlling for financial structure, ownership characteristics, and audit quality, suggesting that the main findings are not driven by omitted governance or financial factors.

With respect to firm performance, EPS remains positive and highly significant, whereas ROE remains statistically insignificant. These findings provide additional support for Hypothesis 2 and suggest that earnings-based measures play a more important role than equity-based measures in executive compensation decisions within Taiwan’s electronic industry.

5.1. Comparison Between Raw and Winsorized Data

Table 6. Comparison of Fixed-Effects Estimates Before and After Winsorization.

Variable	Raw Data FE	Winsorized FE
BOARD_PAY	1.0301 *** (15.1490)	0.5425 *** (11.7175)
EPS	3981.01 *** (12.0397)	3260.08 *** (13.7079)
ROE	−89.74 (−0.7599)	114.0327 (1.3953)
SIZE	11,839.86 ** (2.4876)	12,677.18 *** (6.1326)

Notes: Raw Data FE and Winsorized FE are estimated using the same two-way fixed-effects specification. The latter uses variables winsorized at the 1st and 99th percentiles. t-statistics are reported in parentheses. *** and ** denote statistical significance at the 1% and 5% levels, respectively.

compares the two-way fixed-effects estimates obtained from the original dataset and the winsorized dataset. The results remain largely consistent across the two specifications. BOARD_PAY and EPS continue to exhibit positive and statistically significant associations with executive compensation, while ROE remains insignificant. Although the coefficient magnitudes change modestly after winsorization, the direction and significance of the main variables remain unchanged. These findings suggest that the study’s primary conclusions are not driven by the winsorization procedure.

5.2. Financial Structure Controls

To examine whether firms’ financial structure affects the main results, this study incorporates capital intensity (CAP_INT) and leverage (LEVERAGE) into the fixed effects model.

The results indicate that the positive association between BOARD_PAY and MANAGER_PAY remains stable and highly significant after controlling for firms’ investment structure and financial risk. This finding suggests that the observed relationship between director compensation and executive compensation is not attributable to differences in capital intensity or financing decisions.

Neither CAP_INT nor LEVERAGE exhibits a statistically significant coefficient after firm and year fixed effects are included. Accordingly, financial structure variables appear to provide limited explanatory power for executive compensation once unobserved firm heterogeneity is controlled for.

Overall, the findings confirm that the main results are robust to alternative specifications incorporating financial control.

5.3. Corporate Governance Controls

This study further examines robustness by including governance-related variables such as board ownership (BOARD_HOLD), managerial ownership (MANAGER_HOLD), and audit quality (BIG_4).

The inclusion of these governance variables does not materially alter the main findings. BOARD_PAY remains positive and highly significant throughout all specifications, reinforcing the importance of board-level incentives in shaping executive compensation.

Among the governance variables, MANAGER_HOLD exhibits a positive and statistically significant relationship with executive compensation, suggesting that executives with greater equity ownership tend to receive higher compensation. In contrast, BOARD_HOLD and BIG_4 remain statistically insignificant after controlling for firm and year fixed effects.

Overall, the results suggest that board compensation remains one of the most important governance-related factors associated with executive compensation in the sample firms.

5.4. Instrumental Variable Estimation and Endogeneity Test

To further address potential endogeneity concerns, this study employs a fixed-effects two-stage least squares (FE-2SLS) approach using lagged board compensation (LAG_BOARD_PAY) as an instrumental variable for current board compensation (BOARD_PAY). The rationale is that board compensation policies tend to be persistent over time, making past board compensation highly correlated with current board compensation while reducing concerns that it reflects contemporaneous shocks to executive compensation.

Because the instrumental variable is based on one-period lagged board compensation (LAG_BOARD_PAY), the first year of observations for each firm is unavailable for the FE-2SLS estimation. Consequently, the sample size is reduced from 4680 to 4320 firm–year observations.

Table 5 reports the FE-2SLS estimation results. The first-stage results confirm the relevance of the instrumental variable. Specifically, LAG_BOARD_PAY is positively and highly significantly associated with current BOARD_PAY (β = 0.4063, t = 30.4316, p < 0.01). Furthermore, the first-stage F-statistic of 70.447 substantially exceeds the conventional threshold of 10, suggesting that weak-instrument concerns are unlikely to be problematic.

The second-stage results continue to support Hypothesis 1. BOARD_PAY remains positively and highly significantly associated with executive compensation (β = 0.8509, t = 7.0674, p < 0.01) after controlling for firm fixed effects, year fixed effects, financial characteristics, and governance-related variables. The persistence of this positive relationship indicates that board-level incentives are closely associated with executive compensation decisions.

With respect to firm performance, EPS remains positive and highly significant (β = 2769.16, t = 9.5227, p < 0.01), whereas ROE remains statistically insignificant. These findings provide additional support for Hypothesis 2 and suggest that earnings-based performance measures provide more relevant information for executive compensation decisions than equity-based measures in Taiwan’s electronic industry.

Among the control variables, firm size (SIZE) continues to exhibit a positive and significant association with executive compensation. In contrast, R_D, CAP_INT, LEVERAGE, BOARD_HOLD, and BIG_4 remain statistically insignificant. MANAGER_HOLD remains positively associated with executive compensation, suggesting that managerial ownership may align managerial incentives with compensation outcomes.

Overall, the FE-2SLS results reinforce the robustness of the main findings. The consistency of the estimated BOARD_PAY coefficient across fixed-effects and instrumental-variable specifications suggests that the positive association between board compensation and executive compensation is unlikely to be explained by reverse causality or omitted-variable bias.

5.5. Summary of Robustness Results

The robustness analyses collectively provide strong support for the main findings of this study. Across alternative model specifications, additional financial and governance controls, fixed-effects estimations, and instrumental-variable estimation, the positive association between board compensation and executive compensation remains stable and statistically significant. Furthermore, the evidence consistently indicates that EPS is more informative than ROE in explaining executive compensation decisions within Taiwan’s electronic industry. The stability of these findings across different estimation approaches suggests that the main conclusions are not sensitive to model specification, omitted governance characteristics, or potential endogeneity concerns. Overall, the robustness results reinforce the conclusion that board-level incentives constitute an important governance-related factor associated with executive compensation and that earnings-based performance measures play a more prominent role than equity-based measures in compensation design.

Crucially, the estimated coefficient on EPS remains positive and highly statistically significant in the second-stage FE-2SLS estimation (β = 2769.16, t = 9.5227, p < 0.01). The consistency of this result across both the two-way fixed effects and instrumental-variable specifications suggests that the positive association between earnings-based performance and executive compensation is not driven by reverse causality or omitted-variable concerns.

Moreover, the continued significance of EPS, coupled with the persistent insignificance of ROE, provides further evidence that earnings-based measures are more informative than equity-based measures in explaining executive compensation decisions within Taiwan’s electronic industry. These findings are consistent with the argument that compensation committees place greater emphasis on observable accounting earnings when evaluating managerial performance in capital-intensive and technology-intensive environments.

6. Discussion and Implications

6.1. Interpretation of the Findings

This section interprets the empirical findings in relation to the proposed hypotheses and prior studies. The discussion focuses on two key aspects: the role of board-level incentives in executive compensation decisions and the relative importance of alternative performance measures.

6.1.1. Director Compensation and Executive Compensation (H1)

The results provide strong and consistent support for Hypothesis 1. Across the baseline, fixed-effects, robustness, and FE-2SLS specifications, board compensation (BOARD_PAY) remains positively and significantly associated with executive compensation (MANAGER_PAY). These findings suggest that firms with higher levels of board compensation tend to provide higher compensation to top executives.

From a corporate governance perspective, the results indicate that board compensation represents more than a monitoring cost. Instead, director compensation appears to form part of the incentive environment within which compensation decisions are made. Higher director compensation may be associated with directors’ reference points, norms, and judgments regarding appropriate executive pay levels, thereby contributing to a positive association between board and executive compensation.

Furthermore, the persistence of the relationship after controlling for firm fixed effects, year fixed effects, and potential endogeneity suggests that the observed association is not merely driven by cross-sectional differences across firms. Rather, the results reflect within-firm changes over time, indicating that board-level incentives are closely associated with executive compensation decisions.

These findings are broadly consistent with the managerial power and incentive-based governance literature, which suggests that compensation outcomes are associated not only with firm performance but also with the incentive structures faced by directors themselves. Accordingly, this study contributes to the literature by highlighting director compensation as an important governance-related factor associated with executive pay rather than a passive governance cost.

6.1.2. Performance Measures and Executive Compensation (H2)

The results also support Hypothesis 2. Earnings per share (EPS) exhibits a consistently positive and significant relationship with executive compensation across all major specifications, whereas return on equity (ROE) remains statistically insignificant.

These findings suggest that earnings-based performance measures exhibit stronger explanatory power for executive compensation than equity-based ratios. In capital-intensive industries such as Taiwan’s electronic sector, ROE may reflect capital structure decisions, equity adjustments, and investment cycles that are only indirectly related to managerial effort. Consequently, ROE may provide a noisier signal of managerial performance.

In contrast, EPS provides a more direct and observable measure of economic performance. Because EPS reflects earnings attributable to shareholders and is less sensitive to fluctuations in the equity base, it may serve as a more informative performance indicator in explaining executive compensation. The stronger explanatory power of EPS observed in this study suggests that accounting-based earnings measures remain highly relevant in compensation-setting contexts within technology-intensive firms.

More broadly, these findings contribute to the executive compensation literature by demonstrating that not all performance measures are equally informative in explaining compensation outcomes. The results indicate that EPS exhibits stronger explanatory power than ROE in explaining executive compensation within the context of Taiwan’s electronic industry.

6.2. Implications for Corporate Governance and Compensation Design

The findings have several implications for corporate governance and compensation design. First, the results suggest that director compensation is associated with executive pay outcomes beyond its intended role as a governance cost. The consistently positive relationship between board compensation and executive compensation indicates that directors’ incentives may be associated with compensation norms, reference points, and decision-making processes within firms. Consequently, compensation committees and boards should consider the joint incentive structure of directors and executives rather than treating the two compensation systems separately.

Second, the results highlight the importance of performance metric selection in executive compensation design. The results consistently show that EPS exhibits stronger explanatory power than ROE in determining executive compensation. This suggests that compensation committees should carefully evaluate the informational properties of alternative performance measures. In capital-intensive and technology-intensive industries, earnings-based measures may provide more reliable performance signals than equity-based measures that are susceptible to capital structure effects and accounting adjustments.

Finally, the limited impact of traditional governance variables suggests that formal governance structures alone may not fully explain executive compensation. Instead, incentive mechanisms embedded in compensation design appear to play a more important role. These findings reinforce the importance of examining governance through the lens of incentives rather than relying exclusively on structural governance characteristics.

6.3. Policy and Institutional Implications

From a regulatory perspective, the findings suggest that greater attention should be given to board compensation structures. While existing regulations emphasize executive pay disclosure, less focus has been placed on how director compensation affects compensation decisions.

Improved disclosure of board compensation arrangements could enhance transparency and help investors better understand compensation-setting processes. Rather than imposing strict limits, policies that improve transparency may be more effective.

In markets with relatively mature governance systems, such as Taiwan’s electronic industry, focusing on incentive alignment may be more impactful than introducing additional structural regulations.

Furthermore, the findings highlight the importance of aligning compensation systems with industry characteristics. In technology-intensive and capital-intensive sectors, accounting-based earnings measures may provide more informative performance signals than equity-based indicators. Accordingly, firms and regulators should recognize that effective compensation design may require flexibility in the selection of performance measures rather than adopting a one-size-fits-all approach.

6.4. Discussion Summary

In summary, the findings suggest that executive compensation is related to both firm performance and board-level incentives. Board compensation plays a significant role in shaping executive pay, while EPS serves as a more informative performance measure than ROE in explaining executive compensation. This finding highlights the importance of selecting performance metrics that reflect industry characteristics and the informational content of alternative accounting measures.

These findings suggest that understanding executive compensation requires attention to both performance evaluation and incentive structures. Overall, the consistency of results across baseline, fixed-effects, robustness, and FE-2SLS specifications strengthens the credibility of the study’s conclusions.

7. Conclusions

This study examines the factors associated with executive compensation, with a particular focus on the role of board-level incentives, using a balanced panel of listed electronic firms in Taiwan over the period 2012–2024. By employing two-way fixed effects models and a two-stage least squares (2SLS) instrumental variable approach, the analysis controls for unobserved heterogeneity and potential endogeneity, thereby improving the reliability of empirical analysis.

The empirical results yield several key findings. First, director compensation exhibits a strong and robust positive association with executive compensation across all model specifications, including the baseline, fixed-effects, robustness, and FE-2SLS estimations. This persistent linkage suggests that director compensation constitutes an important component of the board’s incentive environment and is closely associated with executive compensation decisions.

Second, the findings indicate that earnings per share (EPS) provides stronger explanatory power for executive compensation than return on equity (ROE). While EPS remains positive and highly significant across all major specifications, ROE remains statistically insignificant. These results suggest that earnings-based performance measures provide more informative signals for compensation-setting decisions than equity-based measures in Taiwan’s capital-intensive electronic industry.

Third, the robustness analyses provide consistent support for the main findings. The inclusion of additional financial structure and governance controls, firm and year fixed effects, and the FE-2SLS estimation using lagged board compensation as an instrumental variable do not materially alter the primary results. The consistency of the estimates suggests that the observed association between board compensation and executive compensation is unlikely to be explained by omitted-variable bias, reverse causality, or alternative model specifications.

Despite these insights, certain limitations remain. This study focuses on a single technology-intensive industry within a specific institutional context and relies primarily on cash-based compensation measures.

Although lagged board compensation serves as a relevant instrument because compensation policies tend to be persistent over time, its validity may be constrained by potential serial correlation and the possibility that unobserved governance characteristics also persist across periods. Future studies may explore alternative exogenous instruments, regulatory shocks, or natural experiments to further strengthen causal identification.

In addition, several governance-related characteristics, including board independence, board diversity, committee composition, institutional ownership, and ownership concentration, were not explicitly incorporated into the empirical models due to data constraints. Future studies may examine whether these governance factors provide additional insights into the association between board incentives and executive compensation.

Future research could also extend this line of inquiry by incorporating equity-based compensation and long-term incentive structures, as well as exploring alternative empirical approaches, such as dynamic panel estimations, to examine the persistence of compensation dynamics over time.

Overall, the findings suggest that executive compensation is associated with both firm performance and board-level incentive structures. By highlighting the governance role of director compensation and the importance of performance measure selection, this study contributes to the literature on executive compensation, corporate governance, and incentive design.