Compensation committees and CEO pay

Purpose The purpose of this paper is to address whether gender diversity on compensation committees ensures objective determination of CEOs’ compensation. Design/methodology/approach The authors use a sample of companies listed in China from 2006 to 2015. The authors use pooled ordinary least square regression as the baseline methodology, and two-stage least square regression and propensity score matching to control for endogeneity. Findings The authors find evidence that gender-diverse compensation committees limit CEOs’ total cash compensation and strengthen the link between CEO pay and firm performance, but only independent female directors have a significant impact, indicating that the monitoring effect outweighs the executive effect. Moreover, compensation committees with a critical mass of female directors have more impact on CEOs’ total pay and the link between CEO pay and firm performance than do committees with a single female director. Finally, gender-diverse compensation committees are more effective in setting CEOs’ compensation in state-controlled firms, where agency issues are more severe. Practical implications Female directors can improve firm-level governance by monitoring management actions, such as setting CEOs’ compensation. The study contributes to the debate on gender diversity in the boardroom, finding a positive economic effect. The study sheds light on China’s diversity practices at the director level and provides empirical guidance to China’s regulatory bodies. Originality/value The authors extend earlier studies by providing the first empirical evidence that gender-diverse compensation committees strengthen the link between CEO pay and firm performance; that independent female directors are more effective in the monitoring role than executive female directors; that compensation committees with a critical mass of female directors are more effective in setting CEOs’ pay than are committees with a single female director; and that the influence of gender-diverse compensation committees on CEOs’ pay varies by type of ownership.

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Board compensation committees: CEO pay and market cap performance with implications for investors

Corporate Ownership and Control ◽

10.22495/cocv14i3c1art3 ◽

2017 ◽

Vol 14 (3) ◽

pp. 180-187 ◽

Cited By ~ 1

Author(s):

Hugh Grove ◽

Maclyn Clouse

Keyword(s):

Board Of Directors ◽

Pay For Performance ◽

Weighted Average ◽

Executive Pay ◽

Metal Mining ◽

Primary Metal ◽

Market Capitalization ◽

Top Executives ◽

Ceo Pay ◽

Compensation Committees

Board of Directors’ compensation committees currently have no pay provisions requiring CEO or top executives’ compensation claw-backs for market capitalization destruction which could have huge impacts on such top executive pay. For example, CEO pay was correlated with market capitalization performance for 24 companies in the metal mining, primary metal, and coal mining industries. Simple correlation tests of 2013 total CEO pay with market capitalization destruction over the five-year period, January 2011 through December 2015, yielded a 74% weighted average strong correlation. The total annual pay for these 24 CEOs was $198 million or an estimated $1 billion over the five-year period from 2011-2015. During this same five-year period, the market capitalization for these 24 companies decreased 73% or $180 billion. During this same five-year time period, the S&P 500 Index increased 63%. Some corporate governance researchers (Kostyuk, 2014 and Hilb, 2008) have advocated: “Pay for Performance, not Presence” which could include such correlations with claw-back provisions as part of executive compensation packages from Board of Directors’ compensation committees.

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Audit firm tenure and perceived audit quality: evidence from CEO incentive contracts

Review of Accounting and Finance ◽

10.1108/raf-07-2018-0139 ◽

2020 ◽

Vol 19 (3) ◽

pp. 313-337

Author(s):

Henri Akono

Keyword(s):

Audit Quality ◽

Performance Metrics ◽

Cash Flows ◽

Performance Measure ◽

Content Type ◽

Audit Firm ◽

Auditor Tenure ◽

Ceo Pay ◽

Incentive Contracting ◽

Compensation Committees

Purpose This paper aims to examine how compensation committees perceive audit quality as indicated by audit firm tenure. Using the contracting weight attached to earnings and cash flows in chief executive officer (CEO) compensation as proxy for the compensation committee’s perception of audit quality, the study examines whether compensation committees perceive performance metric informativeness as being affected by auditor tenure. Design/methodology/approach The paper regresses CEO cash compensation on accounting-based performance metrics and on interactions between auditor tenure and accounting-based performance metrics while controlling for other factors previously shown to affect CEO pay. Auditor tenure is measured using continuous and dichotomous variables. Findings Auditor tenure is associated with a reduced (positive) weight on earnings (operating cash flows), which suggests lower perceived audit quality as tenure lengthens consistent with the auditor closeness argument. This relation is asymmetric, i.e. the negative effect of longer auditor tenure on incentive contracting is more pronounced for positive earnings. The results are robust to using CEO total compensation as the compensation measure, as well as using level and change specifications. Research limitations/implications The inability to control for audit partner tenure in assessing the effect of audit firm tenure on incentive contracting and the potential endogeneity between auditor tenure choice and incentive contracting are the main limitations of this study. Given the lack of information on US audit partner tenure, the study could not control for the audit partner tenure issue. However, the study has attempted to mitigate the endogeneity issue by using a Heckman selection model that includes in the first-stage a regression of auditor tenure on various firm, performance measure and CEO-related governance characteristics, based on existing models (Li et al., 2010). Practical implications Compensation committees view auditor tenure as an indicator of accounting quality in setting CEO pay. Further, long auditor tenure is perceived as detrimental to financial reporting integrity, particularly when earnings numbers suggest positive managerial performance and innovations. Originality/value This study provides empirical evidence that auditor tenure matters in setting executive pay. Further, this study shows evidence on the link between auditor tenure and audit quality from an internal user’s perspective. Prior studies have focused either on external users (investors, creditors) or on the preparer (using measures such as discretionary accruals or meet/beat analysts’ forecasts or forecast guidance).

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The Elephant (or Donkey) in the Boardroom

Administrative Science Quarterly ◽

10.1177/0001839216668173 ◽

2016 ◽

Vol 62 (1) ◽

pp. 1-30 ◽

Cited By ~ 31

Author(s):

Abhinav Gupta ◽

Adam J. Wowak

Keyword(s):

Corporate Governance ◽

Firm Performance ◽

Political Psychology ◽

Political Ideology ◽

The Political ◽

Political Ideologies ◽

Ceo Pay ◽

Board Level ◽

The Relationship ◽

Compensation Committees

We examine how directors’ political ideologies, specifically the board-level average of how conservative or liberal directors are, influence boards’ decisions about CEO compensation. Integrating research on corporate governance and political psychology, we theorize that conservative and liberal boards will differ in their prevailing beliefs about the appropriate amounts CEOs should be paid and, relatedly, the extent to which CEOs should be rewarded or penalized for recent firm performance. Using a donation-based index to measure the political ideologies of directors serving on S&P 1500 company boards, we test our ideas on a sample of over 4,000 CEOs from 1998 to 2013. Consistent with our predictions, we show that conservative boards pay CEOs more than liberal boards and that the relationship between recent firm performance and CEO pay is stronger for conservative boards than for liberal boards. We further demonstrate that these relationships are more pronounced when focusing specifically on the directors most heavily involved in designing CEO pay plans—members of compensation committees. By showing that board ideology manifests in CEO pay, we offer an initial demonstration of the potentially wide-ranging implications of political ideology for how corporations are governed.

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