Remuneration Committee, Board Independence and Top Executive Compensation
2. Prior Studies and Hypothesis Development
|Num of firm-year observations|
|1,734 firms listed in the Taiwan Stock Exchange (TSE), Over-the Counter (OTC), and Emerging Stock (ES) markets at the 2011 fiscal year-end from 2008 to 2011||6,936|
|Less:||Firms within the financial industry||(192)|
|CEO compensation data are missing||(811)|
|Historical annual stock return (Ret) to calculate standard deviation of Ret or Ret for current year are missing||(1,106)|
|Net sales to measure firm size (Firm_Size) are missing||(37)|
|CEO ownership (CEO_Ownership) data are missing||(43)|
|CEO_ Comp (upper)||NT$||6,970,603||8,706,381||2,832,000||5,000,000||10,000,000|
|CEO_ Comp (lower)||NT$||3,084,053||4,842,515||0||2,000,000||5,000,000|
|CEO_ Comp (average)||NT$||5,027,328||6,744,760||1,416,000||3,500,000||7,500,000|
5. Empirical Findings
|Dependent Variable: Ln(CEO_Comp)|
|Independent Variables||Pred. sign||(1)||(2)||(3)||(4)||(5)|
|Non_IndDir × RC_Setup||‒||-0.01|
|Ret × RC_Setup||+||0.001|
|Non_IndDir × Ret × RC_Setup||+||0.001|
|Ret × RC_EarlyAdopter||+||0.003**|
Conflicts of Interest
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- 1According to the Securities and Exchange Law (Article 14-6), a company whose stock is listed on the Taiwan stock exchange (TSE) or traded in the over-the-counter (OTC) market shall establish a remuneration committee. Regulations governing the professional qualifications for its members, the exercise of their powers of office, and related matters shall be prescribed by the Financial Supervisory Committee (FSC). Top executive remuneration includes cash salary, stock options, stock bonuses, retirement benefits and severance pay, various subsidies and allowances, and other material incentives.
- 2For example, .
- 3Relatedly, the Greenbury Committee  urged the adoption of RCs consisting of solely nonexecutive directors. Similarly, the U.S. Securities and Exchange Committee (SEC) in 1992 adopted provisions encouraging nonexecutive directors to be more responsible for establishing executive pay by increasing disclosure requirements when corporate insiders serve on RCs. In addition, the 1993 congressional tax code stipulates that RCs must be composed solely of two or more nonexecutive directors, or performance-based executive pay in excess of USD $1 million is not tax deductible. The listing requirements of the New York Stock Exchange (NYSE) and NASDAQ mandate majority-independent boards. The NYSE also requires entirely independent compensation committees. The NASDAQ rules are similar, while more flexible, than the NYSE (e.g., [11,12]).
- 4However, this position does not necessarily imply an association between affiliated or interdependent RC members and CEO compensation [11, 15]. One possible reason for this is that affiliated or interdependent directors serving on a powerful committee are mindful of their duty to shareholders, regardless of their level of dependence .
- 5In contrast to the alternative form, the null hypothesis states that voluntary appointment of independent directors has no impact on the levels of CEO pay. Though prior studies have provided conflicting evidence regarding how the independence of boards affects the CEO pay levels, to the extent that the board independence can reasonably reduce the agency cost we expect to observe a higher level of CEO pay for non-adopters of independent directors. To formulate hypotheses in an alternative form can be widely seen in prior accounting or finance research papers. In this study we also follow this convention.
- 6Moreover,  suggested that the increasing use of non-executive directors has a positive impact on U.K. board structure and governance arrangements.
- 7To test our hypotheses, we need to control for the effects of CEO pay determinants which can affect the CEO pay level but are irrelevant to our research questions. Therefore, in our model specification, we include economic determinants of top executive pay, including firm growth potential, operating risk, firm size and firm performance [34,35,36].
- 8One major reason for the use of log-transformed CEO compensation in our regression analysis is that the “guide charts” are constructed by regressing the logarithm of pay on the logarithm of firm size (e.g., ). This practice is widely used by human resource consultants to determine the pay levels .
- 9We do not use a lag structure in our model specification because our interest is mainly on the contemporaneous pay-performance association and the levels of CEO pay are determined largely on the firm performance rather than on the pay level for the previous period. In addition, the year-dummies and industry-dummies are chosen based on the sample period (i.e., 2008–2011) and 27 industry sectors, based on the TSE industry classification codes.
- 10If sample firms do not meet the listing requirements of TSE for some reasons (e.g., financial distress), they are required to stop trading temporarily or delisted by the authority. This is the main reason why the stock price, financial and CEO pay data are missing.
- 11Untabulated statistics show that the average CEO annual compensation increases over the 2008-2010 period. The means of the midpoint of CEO annual pay are NT$ 4.64 (NT$ 4.71 and NT$ 5.41) million for 2008 (2009 and 2010). However, the mean drops a little in 2011, which is NT$ 5.28 million.
- 12For the regression analysis of the first hypothesis, we conduct two sets of diagnostic tests. First, we run Breusch-Pagan test for heteroskedasticity. The chi-square is 8.54, which rejects the null of constant variance at the 1% significance level. Second, we run the test for autocorrelation in the panel data; the F-statistics is 75.42, which reject the null of no first-order autocorrelation at the 1% significance level. To address these issues, we calculate the t-statistics (in parentheses) based on  heteroskedasticity and autocorrelation-consistent standard errors. Since the diagnostic checks for regression analyses from the second to the fifth hypotheses all reject the null of homogeneity of variance and no autocorrelation, in Table 3 we report t-statistics based on  heteroskedasticity and autocorrelation-consistent standard errors for all test results.
- 13We notice that the adjusted R-squares reported in Table 3 seem comparable. Even though some of the above coefficient estimates are significant, Non_IndDir, RC_Setup, Non_IndDir × RC_Setup, Ret × RC_Setup, Non_IndDir × Ret × RC_Setup, RC_EarlyAdopter and Ret×RC_EarlyAdopter have negligible explanatory power for ln(CEO_Comp), causing adjusted R-squares to remain barely unchanged.
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Kuo, C.-S.; Yu, S.-T. Remuneration Committee, Board Independence and Top Executive Compensation. J. Risk Financial Manag. 2014, 7, 28-44. https://doi.org/10.3390/jrfm7020028
Kuo C-S, Yu S-T. Remuneration Committee, Board Independence and Top Executive Compensation. Journal of Risk and Financial Management. 2014; 7(2):28-44. https://doi.org/10.3390/jrfm7020028Chicago/Turabian Style
Kuo, Chii-Shyan, and Shih-Ti Yu. 2014. "Remuneration Committee, Board Independence and Top Executive Compensation" Journal of Risk and Financial Management 7, no. 2: 28-44. https://doi.org/10.3390/jrfm7020028