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

15 Pages Posted: 27 Apr 2009

See all articles by Jerry Sun

Jerry Sun

University of Windsor - Odette School of Business

Steven F. Cahan

University of Auckland Business School

Abstract

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.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.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.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.EmpiricalWe 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.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.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.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.

Suggested Citation

Sun, Jerry and Cahan, Steven F., The Effect of Compensation Committee Quality on the Association between CEO Cash Compensation and Accounting Performance. Corporate Governance: An International Review, Vol. 17, Issue 2, pp. 193-207, March 2009, Available at SSRN: https://ssrn.com/abstract=1375913 or http://dx.doi.org/10.1111/j.1467-8683.2008.00726.x

Jerry Sun (Contact Author)

University of Windsor - Odette School of Business ( email )

401 Sunset
Windsor N9B 3P4, Ontario
Canada
519-2533000-3122 (Phone)

Steven F. Cahan

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

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