بررسی تجربی نقش مدیر عامل و کمیته جبران خسارت در ساختار پرداخت اجرایی

Motivated by the potential for opportunistic behavior in pay decisions, recent SEC and IRS regulations essentially preclude inside directors from serving on a firm’s compensation committee (CC). We examine whether greater CC independence promotes shareholder interests and whether the CEO’s presence on the CC leads to opportunistic pay structure. We find little evidence that greater committee independence affects executive pay. Moreover, committees consisting of insiders or the CEO do not award excessive pay or lower overall incentives. For example, we find no evidence that pay decreases or total incentives increase when CEOs come off the CC. Our results suggest that regulations governing committee structure may not reduce levels of pay or achieve efficiencies in incentive contracts.

Executive compensation plays a fundamental role in attracting and maintaining quality managers and provides motivation for executives to perform their duties in shareholders’ best interests. For most large companies, the specific design of executive pay is delegated to a subcommittee of the board of directors, the compensation committee (CC). This board subcommittee plays an important role because it must be concerned with setting and structuring pay packages that attract and retain top management so as to provide the right incentives for managers to operate in shareholders’ interests. The view that CCs are important, and the potential problems with committee makeup, is reflected in recent government regulations. In particular, concern over opportunistic behavior by company insiders sitting on CCs led to government intervention in the design of committee structure. In 1992, the SEC adopted provisions encouraging directors without ties to the firm to be more responsible for establishing executive pay by increasing disclosure requirements when corporate insiders serve on CCs. In addition, the 1993 congressional tax code stipulates that CCs must be composed solely of two or more outside directors or performance-based executive pay in excess of $1 million is not tax deductible.1 While the general focus of government regulation has been to encourage outside board representation on CCs, the presence of insiders on the committee does not preclude the design of pay contracts that are in shareholders’ interests. CEOs that own substantial equity, who manage recently created firms, or who are founders may choose to sit on the CC to effectively design incentive programs for other executives. Moreover, insiders may understand the specific social and political aspects of a company that are useful for compensation advisors or CCs in structuring incentives. Consequently, insiders may provide beneficial monitoring and transmission of information that minimizes organizational costs (Coase, 1937), which suggests that the SEC and IRS regulations may interfere with what is otherwise an effective voice in setting executive pay. The purpose of this paper is twofold: first, to examine the CC’s role in setting executive pay and second, to provide some evidence on the rationale for government regulation in the design of board committees. We begin by examining the role that outside board members and non-CEO insiders who sit on the CC play in executive pay design. Next, we investigate the CEO’s influence on pay practices by examining CEO pay when CEOs are members of their own CC. Finally, we analyze pay changes, if any, when CEOs come off the CC. CEOs sitting on their own CCs perhaps provide the cleanest example of agency problems that can occur between self-serving executives and shareholders. If as regulators suggest, agency conflicts are significant and insiders behave opportunistically, then we expect greater independent director representation and the absence of the CEO on the CC to produce pay contracts that are in the interests of shareholders. Our results indicate that CC structure significantly changes after the adoption of government regulation. Examining a random sample of 110 New York Stock Exchange firms from 1985 to 1998, we find evidence that before regulation, independent directors hold over 59% of committee seats. By the end of our sample period (1998), we note that inside directors are essentially absent from CCs and independent directors dominate the committee by holding 75% of the seats. While the regulations did increase CC independence, we find little evidence that the presence of insiders (outsiders) on the CC is problematic (advantageous). We find that before regulation, the composition of the CC affects neither pay levels nor overall incentives (compensation plus ownership). While we find some marginal evidence that CCs with more insiders use slightly less equity-based pay, we also find that when there are more insiders on the CC, the CEO tends to own a lot more equity. When including ownership along with compensation to capture the effect of overall performance sensitivity for CEOs, we find no evidence that the presence of insiders (outsiders) on the CC lower (increase) CEO incentives. Most interestingly, we do not find evidence (before regulation) that CEOs serving on the CC act opportunistically in terms of pay structure. CEOs who sit on the CC, tend to be modestly paid (they receive less fixed pay and total pay). While they receive less equity-based pay and the sensitivity of their pay is lower, they own a large amount of stock. Because of the high levels of ownership, the sensitivity of total wealth (options and stockholdings) to firm performance is greater for CEOs serving on the CC. We also do not find that the introduction of the regulatory restrictions led to the use of more performance-based pay. While the use of equity-based pay has risen over time, it does not appear to have independently increased because of greater CC independence. We also document that executives and retired executives of other firms serving on the CC do not award higher pay levels or pay that is less sensitive to firm performance. This latter result contradicts the popular notion that CEOs from other firms serving on CCs encourage outrageous pay practices by paying more and reducing the riskiness of pay. To provide further evidence on the rationale for SEC and IRS regulations discouraging insiders from sitting on the CC, we examine CEO compensation for a different sample of NYSE firms between 1985 and 1994 where the CEO sits and subsequently comes off the CC. We compare pay practices in these firms to a matched industry and size control sample where the CEO never serves on the CC. If CEOs behave opportunistically, we expect to observe changes in pay practices that lower pay and/or increase incentives once the CEO comes off the CC. Our analysis indicates that while the use of equity-based pay increases once the CEO steps off the CC, CEOs also reduce their ownership positions in the firm. The drop in ownership is particularly significant for CEOs who were founders. Interestingly, there is some evidence that the drop in equity ownership results in a reduced sensitivity of total wealth (options and equity) for CEOs after leaving the CC. Overall, we argue these results do not support the notion that insiders or the presence of the CEO on the CC results in opportunistic pay decisions. While having more outsiders on the CC can increase monitoring, at least in terms of pay design, we find no evidence the rules were necessary. Moreover, the regulations potentially impose regulatory and/or firm specific costs, which in our analysis of pay structure and ownership have no offsetting benefits. Finally, the introduction of regulation potentially creates suboptimal contracts. If committee design, pay structure, and ownership were optimal before regulation, any change in these contractual arrangements because of regulation could create incentive problems.2 We organize the paper as follows. Section 2 describes the data and empirical methodology used in the study. We present our hypotheses and the empirical evidence on CCs in 3 and 4. Conclusions are in Section 5.

Activist investors and institutional investors regularly call for reform in boards of directors and their subcommittees. The belief by these groups is that outside directors better serve shareholders. The view that outside directors are panaceas to potential agency conflicts resonates in recent regulatory and legal mandates that promote independent representatives on the CC. The concern over the makeup of the CC arises from that fact that executive pay is perhaps one of the most important contracting devices in the firm. Consequently, CCs that are not set up to optimally structure pay can impose enormous agency costs and inefficiencies on the firm. We find very little evidence indicating that CCs with greater outside-director representation use more performance-based pay. Pay mix, pay levels, and pay sensitivities are largely unrelated to committee independence. To the contrary, we find that the presence of insiders on the CC is associated with higher levels of CEO ownership. Thus, even with substantial insider representation on the CC, CEOs still have significant amounts of their wealth tied to shareholder performance. Most interestingly, we find no evidence that CEOs serving on their CC receive higher levels of pay or have lower overall incentives than CEOs who are not members of their CC. Finally, we find that pay neither falls nor total incentives increase when the CEO leaves the CC. In light of our findings, we express reservations about the need to regulate the structure of the board’s CC. The regulation may have unintended consequences such as preventing founder CEOs from sitting on the CC and providing input on subordinates’ pay packages. In addition, forcing the CEO or other insiders off the CC may also motivate CEOs to sell equity and force the board to use more equity-based pay. “Excessive” use of performance-based pay can lead to suboptimal investment (Lambert, 1986; Stein, 1989). Moreover, placing more emphasis on pay to align managers’ and shareholders’ interests can lead to other potential opportunistic behavior such as the timing of information releases around option grants (e.g., Yermack, 1997). Taking away flexibility in board design and contracting may result in suboptimal contracts and behavior and thereby impose contracting costs on the firm (Coase, 1937). Given that regulations generally impose costs on society and the firm, more evidence is needed to identify the benefits associated with the regulatory changes to warrant their implementation.