The Effect of Compensation Committee Quality on the Association between CEO Cash Compensation and Accounting Performance
Corporate Governance: An International Review
Corporate governance, Chief executive officers, Compensation, Business management, Management science, Business And Economics, U.S.A., Accounting, Senior management
We examine the effect of compensation committee quality on the association between CEO cash compensation and accounting earnings and the moderating effects of growth opportunities and earnings status.
Research Findings/Insights: Using a sample of 812 US firms, we find that CEO cash compensation is more positively associated with accounting earnings when firms have high compensation committee quality. We also find that the positive effect of compensation committee quality on the association between CEO cash compensation and accounting earnings is less for high growth firms or loss-making firms.Theoretical
Implications: We contribute to the agency-based research on CEO compensation by: 1) directly examining the impact of compensation committee quality on the sensitivity of CEO cash compensation to accounting earnings; 2) examining whether the role of compensation committee quality varies across firms; and 3) developing a broader and richer measure of compensation committee quality.
Practical Implications: Our findings imply that shareholders and directors should be concerned about the composition of compensation committees as we find that compensation committee quality varies depending on compensation committee size and other characteristics of the committee members. Our findings also imply that for compensation committee members, there are greater challenges in monitoring CEO compensation contracts for firms with high growth or that incur losses. Further, our findings imply that even when all compensation committees are regulated to be fully independent, there are still quality differences among these independent compensation committees.
Sun, Jerry and Cahan, Steven. (2009). The Effect of Compensation Committee Quality on the Association between CEO Cash Compensation and Accounting Performance. Corporate Governance: An International Review, 17 (2), 193-207.
The article for download is a post print. The definitive version is published in Corporate Governance: An International Review. It is available here. Copyright (2012) John Wiley & Sons, Inc.