Board committees, CEO compensation, and earnings management

We analyze the effect of committee formation on how corporate boards perform two main functions: setting CEO pay and overseeing the financial reporting process. The use of performance-based pay schemes induces the CEO to manipulate earnings, which leads to an increased need for board oversight. If the whole board is responsible for both functions, it is inclined to provide the CEO with a compensation scheme that is relatively insensitive to performance in order to reduce the burden of subsequent monitoring. When the functions are separated through the formation of committees, the compensation committee is willing to choose a higher pay-performance sensitivity as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management

Wolves in the Hen-House? The Consequences of Formal CEO Involvement in the Executive Pay-Setting Process

New Zealand firms exhibit significant variation in the extent to which they formally involve CEOs in the executive pay-setting process: a considerable number sit on the compensation committee, while others are excluded from the board altogether. Using 1997-2005 data, we find that CEOs who sit on the compensation committee obtain generous annual pay rewards that have low sensitivity to poor performance shocks. By contrast, CEOs who are not board members receive pay increments that have low mean and high sensitivity to firm performance. Moreover, the greater the pay increment attributable to CEO involvement in the pay-setting process, the weaker is subsequent firm performance over one, three- and five-year periods.pay-performance sensitivity; compensation committee; CEO influence

The economic determinants of compensation committee quality

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\u27 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\u27s 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

The Effect of Compensation Committee Quality on the Association between CEO Cash Compensation and Accounting Performance

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

PENGARUH EFEKTIVITAS KOMITE AUDIT DAN KOMPENSASI CEO TERHADAP FEE AUDIT PADA PERUSAHAAN YANG TERDAFTAR DI BEI

The objective of this study is to examine the influence of audit committee effectiveness and CEO compensation to corporate audit fees of all companies listed in Bursa Efek Indonesia (BEI). This study used secondary data form annual report. The population in this study consists of all listed firms in Indonesia Stock Exchange in year 2010-2014. Sampling method used is purposive sampling. A total sample of 165 companies were used in analysis. The data is analyzed using multiple linear regression analysis. The empirical result of this study show that audit committee independence, audit committee size, audit committee meeting frequency, audit committee expertise and CEO compensation are positively significant influenced on corporate audit fees

FDIC Improvement Act and corporate governance of commercial banks

This paper examines provisions of the FDIC Improvement Act related to corporate governance of banks. These provisions focus on the composition and independence of the audit committee and on increased regulatory influence over executive compensation. The composition of audit committees for a sample of banking firms for 1990 is compared with those of industrial firms and with the provisions of FDICIA. The findings suggest only minor differences between banks and other firms; however, under FDICIA provisions, large changes in the composition of bank audit committees are likely. Provisions related to compensation have focused on CEOs. To address this issue, I compare the 1990 levels and factors explaining differences in CEO compensation for a sample of banks and industrial firms. The findings suggest that bank CEOs earn slightly less than their industrial counterparts and that cross-sectional differences in CEO compensation in banking and other industries are explained by similar factors.Banking law ; Federal Deposit Insurance Corporation Improvement Act of 1991 ; Bank directors

Us Knows Us in the UK: On Director Networks and CEO Compensation

We analyze the relation between CEO compensation and networks of executive and non-executive directors for all listed UK companies over the period 1996-2007. We examine whether networks are built for reasons of information gathering or for the accumulation of managerial influence. Both indirect networks (enabling directors to collect information) and direct networks (leading to more managerial influence) enable the CEO to obtain higher compensation. Direct networks can harm the efficiency of the remuneration contracting in the sense that the performance sensitivity of compensation is then lower. We find that in companies with strong networks and hence busy boards the directors’ monitoring effectiveness is reduced which leads to higher and less performance-sensitive CEO compensation. Our results suggest that it is important to have the ‘right’ type of network: some networks enable a firm to access valuable information whereas others can lead to strong managerial influence that may come at the detriment of the firm and its shareholders. We confirm that there are marked conflicts of interest when a CEO increases his influence by being a member of board committees (such as the remuneration committee) as we observe that his or her compensation is then significantly higher. We also find that hiring remuneration consultants with sizeable client networks also leads to higher CEO compensation especially for larger firms.Executive remuneration;Professional and social networks;Corporate governance;Managerial Power;Remuneration consultants

THE INFLUENCE OF STRUCTURES AND ACTIVITIES OF CORPORATE GOVERNANCE ON VOLUNTARY DISCLOSURE OF FINANCIAL REPORT(AN EMPIRICAL STUDY IN BANKING SECTOR LISTED ON INDONESIAN STOCK EXCHANGE YEAR 2013-2014)

The study researches the effect of structures and activities of corporate governance on voluntary disclosure of financial reports in banking companies listed on Indonesian Stock Exchange in 2013-2014. Structures of corporate governance was reflected by the proportion of independent commissioners and audit committee, while the activities of corporate governance was reflected by audit committee meeting and board compensation.The research type used in this research is hypothesis testing, by using random sampling method. Number of banking companies that used as sample is 34 companies for a total study sample was 68 annual reports. The analytical method used was multiple linear regression analysis. The results of this study indicated that the structures and activities of corporate governance simultaneously affect the voluntary disclosure. Partially, the research shows that independent commissioner, audit committee, and audit committee meeting do not affect the voluntary disclosure. Meanwhile, the board compensation has positive effect on voluntary disclosure.Keywords: Voluntary Disclosure, Corporate Governance, Independent Commissioner, Audit Committee, Audit Committee Meeting, and Board Compensation