An Analysis of Independent Directors Incentive Mechanism Based on the Principal-Agent Theory

Since the principal-agent relationship exists between independent directors (IDs) and shareholders, the incentive compatibility problems which are still unsolved should be given more attention. The traditional fixed-pay system could preserve the independence of IDs, however, lack of incentives; the performance-related incentive mechanisms have great impact on IDs' independence which is the core of the system. This paper consider the reputation incentive mechanism (RIM) as an effective way to solve this dilemma. Appropriate RIM can maintain IDs' independence as well as their incentive compatibility.