The remuneration of independent directors in the UK and Italy: An empirical analysis based on agency theory

• We analyzed if agency theory explains independent directors’ remuneration.
• We studied independent directors’ remuneration in Italy and the UK.
• Independent directors’ remuneration reflects observable effort and responsibilities.
• Independent directors who do not fulfil formal independence criteria are paid more.
• Assessing directors’ independence with non-binding criteria is questionable.

This study investigates independent non-executive directors’ remuneration from an agency theory perspective, taking into account both optimal contracting and managerial power perspectives. Using a sample of 1733 independent non-executive directors’ year observations in Italian and UK non-financial firms listed in the period 2007–2009, we find that in both countries independent non-executive directors’ remuneration is mainly based on the observable effort they exert and their responsibilities. Our findings also show that independent non-executive directors who do not fulfil formal independence criteria, as stated in the respective national corporate governance codes, seem to be paid more than those who do fulfil such criteria, particularly in the UK.Our findings contribute to the existing literature by providing evidence on the determinants of independent non-executive directors’ remuneration in two major European economies and offer insights to policy-makers by questioning the effectiveness of adopting non-binding criteria when assessing non-executive directors’ independence.