Compensation Committee Quality and Effective Executive Remuneration

Abstract

Grounding in the agency theory, this paper questions whether high quality compensation committee influences the design of executive remuneration towards the alignment of the contrasting interests between managers and shareholders. Relying on a comprehensive approach that captures the compensation committee quality based on different attributes (i.e. independence, interlocking directorates, directors appointed by minorities) we conduct a two-step empirical analysis. First, we illustrate the evolution over time of the stock option plan characteristics and construct an illustrative diagram that shows the linkages between the attributes of the compensation committee quality and the elements of the option plans. Second, we run a probit regression analysis to deeply investigate the picture emerging from the diagram. Our results document that the quality of compensation committee significantly affects the assignment of incentive stock option plans. The paper evidence advances the knowledge in the literature on compensation committee and executive remuneration, by highlighting that structural characteristics of the committee other than independence of its members play a pivotal role in writing effective remuneration contracts for the executives. Our findings are also useful for investors and policymakers.

Reflections of Corporate Governance on Pay-Performance Sensitivity: A New Perspective

“…The interaction between the variation in the market value with the existence of a remuneration committee (∆VM*CREM) and executive compensation was not significant. This result differs from the findings by Catuogno et al (2016) and Kanapathippillai et al ( 2019), which indicated a positive relationship between the presence of a remuneration committee and PPS. However, model 2 showed that the interaction of the variation in the market value with CEO duality (∆VM*DCEO) was positive and significant at a 5% level.…”

“…This fundamental role places remuneration committees in an outstanding position in the literature that addresses their composition (Conyon, 2014;Strobl, Rama, & Mishra, 2016) mance (Catuogno et al, 2016;Conyon, 2014;Kanapathippillai et al, 2019). Aspects of the remuneration committee have been used in many countries as alternatives to connect the sensitivity of the CEOs' pay to the increase in firm performance.…”

“…Aspects of the remuneration committee have been used in many countries as alternatives to connect the sensitivity of the CEOs' pay to the increase in firm performance. Catuogno et al (2016) studied some characteristics in a sample of 72 Italian companies from 2008 to 2010, which included board independence, board interlocking, and councils elected by minority shareholders. They investigated whether the quality of the committee favored the alignment of compensation and performance.…”

“…They investigated whether the quality of the committee favored the alignment of compensation and performance. Catuogno et al (2016) found that the remuneration committee influences the use of plans of stock options as an incentive to improve firm performance. Similarly, Kanapathippillai et al (2019) studied the same relationship with a sample of 5303 firm-year observations collected from 2005 to 2015.…”

“…Several recent studies in the international literature have found a significant relationship between executive compensation and firm performance (Catuogno, Arena, & Viganò, 2016;Degenhart, Martins, & Hein, 2017;Elsayed & Elbardan, 2018;Kanapathippillai, Mihret, & Johl, 2019). In contrast, a theoretical framework has been investigating, in isolation, how corporate governance mechanisms related to the board of directors and the ownership structure can affect PPS in companies (Reddy et al, 2015;Abraham & Singh, 2016;Ataay, 2018;Amzaleg, Azar, Ben-Zion, & Rosenfeld, 2014).…”