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Article
Publication date: 28 June 2013

Doreen Lilienfeld, John Cannon, Amy Gitlitz Bennett and George Spera

The purpose of this paper is to explain the amendments to the listing standards of the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (Nasdaq), which were…

Abstract

Purpose

The purpose of this paper is to explain the amendments to the listing standards of the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (Nasdaq), which were approved by the Securities and Exchange Commission (the SEC) on January 11, 2013 to implement the SEC's final rules on the independence of compensation committees and their selection of advisors pursuant to Rule 952 of the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank).

Design/methodology/approach

After a summary of notable provisions, the paper explains effective dates and respective Nasdaq and NYSE listing standards pertaining to compensation committee compensation; director independence standards, advisors, and charters; certain exemptions for foreign issuers; exemptions for certain types of companies and partnerships; and recommended next steps for companies that are subject to the amended listing standards.

Findings

Over the past few years, the independence of compensation committees and their advisors has been a hot button corporate governance issue. Dodd‐Frank prohibits national securities exchanges from listing any equity security of an issuer that is not in compliance with the exchanges' compensation committee independence and advisor requirements.

Practical implications

The listing standards generally become effective on July 1, 2013; however, listed companies have until the earlier of: their first annual meeting after January 15, 2014; or October 31, 2014, to comply with certain requirements including the independence structure of their compensation committees.

Originality/value

The paper provides practical advice from experienced financial services lawyers.

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Article
Publication date: 11 May 2012

Nandini Chandar, Hsihui Chang and Xiaochuan Zheng

The purpose of this paper is to examine whether audit committee members of the board prove to be better monitors if they are also on the compensation committee, as they…

Abstract

Purpose

The purpose of this paper is to examine whether audit committee members of the board prove to be better monitors if they are also on the compensation committee, as they would be more attuned to compensation related earnings management incentives.

Design/methodology/approach

The paper uses archival data on a sample of nonfinancial S&P 500 firms representing 1,032 firm years over the period 2003‐2005, and discretionary accruals as a proxy for financial reporting quality.

Findings

Firms with overlapping audit and compensation committees have higher financial reporting quality than those without such overlap. In addition, there is an inverted U‐shaped relationship between overlapping magnitude and financial reporting quality, suggesting that there are costs as well as benefits to overlapping committees.

Practical implications

The findings on this paper have implications for recent policy deliberations on the composition of board committees in general and audit committees in particular, as they clarify the benefits of overlapping committee members.

Originality/value

Understanding the costs and benefits of the board committee structure is particularly important as boards typically operate through the use of committees. This paper contributes to this area by considering the effect of overlapping memberships on two of the most active and important board committees – the compensation and audit committees – on the monitoring effectiveness of the audit committee.

Details

Review of Accounting and Finance, vol. 11 no. 2
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 31 December 2015

Sharon Kay Lee, William Bosworth and Franklin Kudo

Recently all major stock exchanges issued a requirement that listed companies have 100 percent independence on audit committees of the board of directors but now the focus…

Abstract

Purpose

Recently all major stock exchanges issued a requirement that listed companies have 100 percent independence on audit committees of the board of directors but now the focus has turned to compensation committees. Does 100 percent independence on compensation committees make a difference in firm performance? The paper aims to discuss these issues.

Design/methodology/approach

Only 1 percent of the S & P 1,500 firms are not in compliance with the new 100 percent independence requirement for compensation committees. This presents an opportunity to examine characteristics of these firms and if this noncompliance may harm firm performance. Industry-adjusted ROA and Tobin’s Q measures are collected as well as firm size, debt ratios, and the presence of a classified board.

Findings

Findings are as follows: S & P 500 firms with lower levels of debt, have classified board, but do not perform significantly worse than firms in compliance in the same industry; mid-cap firms with debt levels similar to complying firms, have classified boards, and perform significantly worse, and lastly, small-cap firms with lower levels of debt, have classified boards, and perform significantly worse.

Research limitations/implications

Results imply that non-complying mid-cap and small-cap firms may be protecting under-performing management through maintaining classified boards, low levels of debt to avoid scrutiny of the debt markets, and less objectivity (i.e. overall and committee independence) on boards.

Originality/value

Existing corporate governance literature provides evidence that overall board independence may promote shareholder wealth maximization. The latest focus regarding independence has recently been on compensation committees. Should independence on compensation committees matter to shareholders? It is appears that noncompliance should matter in the case of small- and mid-cap firms.

Details

Managerial Finance, vol. 42 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 13 January 2012

Jerry Sun and Steven F. Cahan

The purpose of this paper is to investigate the economic determinants of compensation committee quality.

Abstract

Purpose

The purpose of this paper is to investigate the economic determinants of compensation committee quality.

Design/methodology/approach

Sample firms were selected from the IRRC Directors' database. Compensation committee quality is measured as the factor score from a principal component analysis of six compensation committee characteristics. Regression analyses are conducted to test the hypotheses.

Findings

It was found that firms with lower CEO influence, less institutional shareholders, fewer growth opportunities, and that are smaller in size are more likely to have high quality compensation committees.

Practical implications

The results imply that even in the presence of a requirement to have only independent directors on the compensation committee, the quality of compensation committees can vary cross‐sectionally depending on the firm's economic circumstances. Thus, a one‐size fits all solution for compensation committee quality might not be optimal as different firms have different incentives in composing their compensation committees.

Originality/value

This paper adds to the limited literature on compensation committees by using a new measure of compensation committee quality to examine the economic factors that affect the governance quality of independent compensation committees. This paper also complements the board and audit committee research by examining whether the same factors that affect board and audit committee quality might also affect compensation committee quality.

Details

Managerial Finance, vol. 38 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 29 January 2021

Ruonan Liu

This study aims to examine whether compensation committees dominated by co-opted directors are less effective in mitigating the CEO horizon problem.

Abstract

Purpose

This study aims to examine whether compensation committees dominated by co-opted directors are less effective in mitigating the CEO horizon problem.

Design/methodology/approach

The author uses a sample of 7,280 firm-year observations from 1998 to 2011.

Findings

In this study, the author finds evidence of opportunistic research and development (R&D) reduction and accruals management in firms with retiring CEOs and compensation committees dominated by co-opted directors. Moreover, it is found that R&D reduction and income-increasing accruals are less discouraged when determining the compensation for retiring CEOs by compensation committees that are dominated by co-opted directors. The results suggest that compensation committees dominated by co-opted directors are less effective in adjusting CEO compensation to mitigate the CEO horizon problem.

Originality/value

The study reveals that co-opted directors are weak monitors. Moreover, the study adds empirical evidence to the debate of organizations’ CEO horizon problem. Finally, the study adds to the literature on corporate governance, revealing that compensation committees play an important role in mitigating an organization’s CEO horizon problem by adjusting CEO compensation.

Details

Accounting Research Journal, vol. 34 no. 1
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 16 July 2020

Muhammad Usman, Muhammad Abubakkar Siddique, Muhammad Abdul Majid Makki, Ammar Ali Gull, Ali Dardour and Junming Yin

In this paper, the authors investigate whether an independent and gender-diverse compensation committee strengthens the relationship between top managers' pay and firm…

Abstract

Purpose

In this paper, the authors investigate whether an independent and gender-diverse compensation committee strengthens the relationship between top managers' pay and firm performance in Chinese companies. The authors also investigate whether the independent compensation committee composed of all male directors is effective in designing the optimal contract for executives.

Design/methodology/approach

The authors use data from A-share listed companies on the Shenzhen and Shanghai stock exchanges from 2005 to 2015. As a baseline methodology, the authors use pooled ordinary least square (OLS) regression to draw inferences. In addition, cluster OLS regression, two-stage least square regression, the two-stage Heckman test and the propensity score matching method are also used to control for endogeneity issues.

Findings

The authors find evidence that an independent or gender-diverse compensation committee strengthens the link between top managers' pay and firm performance; that the presence of a woman on the compensation committee enhances the positive influence of committee independence on this relationship; that a compensation committee's independence or gender diversity is more effective in designing top managers' compensation in legal-person-controlled firms than they are in state-controlled firms; that gender diversity on the compensation committee is negatively associated with top managers' total pay; and that an independent compensation committee pays top managers more.

Practical implications

The study results highlight the role of an independent compensation committee in designing optimal contracts for top managers. The authors provide empirical evidence that a woman on the compensation committee strengthens its objectivity in determining top managers' compensation. The study finding supports regulatory bodies' recommendations regarding independent and women directors.

Social implications

The study findings contribute to the recent debate about gender equality around the globe. Given the discrimination against women, many regulatory bodies mandate a quota for women on corporate boards. The study findings support the regulatory bodies' recommendations by highlighting the economic benefit of having women in top management positions.

Originality/value

This study contributes to literature by investigating the largely overlooked questions of whether having a gender-diverse or independent compensation committee strengthens the relationship between top managers' pay and firm performance; whether an independent compensation committee is more efficient in setting executives' pay when it is gender-diverse; and whether the effect of independent directors and female directors on top managers' compensation varies based on the firm's ownership structure. Overall, the main contribution of the study is that the authors provide robust empirical evidence in support of the managerial power axiom.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 6 February 2017

Rachana Kalelkar

Recent studies document that approximately two-thirds of sample firms have at least one audit committee member serving on their compensation committee (Liao and Hsu…

Abstract

Purpose

Recent studies document that approximately two-thirds of sample firms have at least one audit committee member serving on their compensation committee (Liao and Hsu, 2013). Prior studies on overlap membership document that presence of audit committee members on compensation committee affects the reporting quality. Since auditors’ audit risk is affected by reporting quality. The purpose of this paper is to examine how the auditors perceive the overlap of audit and compensation committee members when pricing audit fees.

Design/methodology/approach

The author use a sample from 2007 to 2012 and run an OLS regression.

Findings

The author find a negative association between overlap membership and audit fees. The results are robust after controlling for selection bias, alternate measurement of overlap membership, and an alternate pre- and post-overlap membership test. Additional tests show that the negative relationship between overlap membership and audit fees is explained by lower audit risk and not by lower brand premium of non-Big4 auditors and that the benefit of overlapping membership increases when the audit committee size is large.

Practical implications

The findings suggest that firms with large audit committee can improve their reporting and lower their audit fees by having audit committee members on compensation committee.

Originality/value

The findings contribute to the literature on the consequences of overlap membership and on the ongoing debate about the extent that common membership enhances audit committee monitoring. It also adds to the limited literature on audit committee and audit pricing.

Details

Asian Review of Accounting, vol. 25 no. 1
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 15 February 2018

Muhammad Usman, Junrui Zhang, Fangjun Wang, Junqin Sun and Muhammad Abdul Majid Makki

The purpose of this paper is to address whether gender diversity on compensation committees ensures objective determination of CEOs’ compensation.

Abstract

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.

Details

Management Decision, vol. 56 no. 5
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 January 2006

James W. Bannister and Harry A. Newman

The purpose of this paper is to investigate whether proxy statement performance graph disclosures are influenced by the firm's governance structure and management concerns…

Abstract

Purpose

The purpose of this paper is to investigate whether proxy statement performance graph disclosures are influenced by the firm's governance structure and management concerns about relative performance.

Design/methodology/approach

Logistic regression is used to test whether the level of performance graph disclosure decreases with lower relative performance and higher insider director membership on the compensation committee of the board. Also, Z and t‐statistics test whether bias in the selected peer group benchmark is related to insider membership on the committee.

Findings

The empirical results suggest that reporting discretion was exercised for management's benefit. The amount of explicit disclosure on cumulative returns in the performance graph decreases as relative performance declines and decreases when insider directors serve on the compensation committee. Moreover, the presence of insider directors on the compensation committee is associated with a biased choice of peer group benchmark return.

Research limitations/implications

The sample for the study consists of 141 large firms. Future research could examine a larger group of firms that vary in size or other disclosures.

Practical implications

These findings support recent actions taken to improve corporate governance. Further public policy steps could be taken. For example, the SEC could require firms to include an explanation for appointing insiders to the compensation committee.

Originality/value

The results are consistent with managers using discretion over information disclosures and suggest that compensation committees with insider members play a less active role in providing information that is helpful to shareholders.

Details

Review of Accounting and Finance, vol. 5 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 17 May 2011

Haidan Li and Yiming Qian

The purpose of this paper is to examine whether outside CEO directors sympathize with the company CEO due to their similar positions and prestige, and make decisions in…

Abstract

Purpose

The purpose of this paper is to examine whether outside CEO directors sympathize with the company CEO due to their similar positions and prestige, and make decisions in favor of the company CEO. Specifically, the authors investigate how outside CEO directors serving on the compensation committee influence CEO compensation.

Design/methodology/approach

The authors investigate how outside CEO directors on the compensation committee impact the level and pay‐for‐performance sensitivity of CEO compensation. In addition, the relation between excess CEO compensation (attributable to outside CEO directors) and future firm‐operating performance is examined.

Findings

It is found that outside CEO directors on the compensation committee are associated with higher CEO compensation. However, excess CEO compensation attributable to outside CEO directors leads to poor future firm‐operating performance. Outside CEO directors are associated with higher CEO pay‐for‐performance sensitivity when the company experiences positive stock returns, but do not impact pay‐for‐performance sensitivity when firm performance is poor. Finally, when the company CEO has more influence on the board, outside CEO directors are more likely to serve on the compensation committee.

Originality/value

The paper is among the first to show that having outside CEO directors on the compensation committee might create agency problems and is costly to shareholders. The findings of the authors' study are relevant to current efforts of regulators and private sectors to enhance oversight of executive compensation.

Details

Review of Accounting and Finance, vol. 10 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

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