Performance-Based Incentives for Internal Monitors

Performance-Based Incentives for Internal Monitors

By David F. Larcker, Christopher Armstrong, Alan Jagolinzer
February 15,2010Working Paper No. 2052

This study examines the use of performance-based incentives for internal monitors (general counsel and chief internal auditor) and whether these incentives impair monitors independence by aligning their interests with the interests of those being monitored. We find evidence that incentives are greater when monitors job duties contribute more to the firms production function, when other top managers receive greater incentives, and when a firm has lower expected litigation risk. We also find evidence that firms provide more incentives when there is greater demand for internal monitoring. We find no evidence that internal monitor incentives impair the monitoring function. Instead, our results suggest that adverse firm outcomes (e.g., regulatory enforcement actions and internal-control material-weakness disclosures) occur less frequently at firms that provide greater monitor incentives.

Keywords
performance-based incentives, internal monitors, general counsel, accounting irregularities