Compensation Committee Quality and the Relationship between CEO Cash Compensation and Accounting Performance—Evidence From Taiwan

Abstract

This paper examines the effect of compensation committee quality on the relationship between Chief Executive Officer (CEO) cash compensation and accounting earnings by using a sample of 1,247 publicly-traded Taiwan firms from 2009 to 2011. This paper finds that executive cash compensation is more positively associated with accounting earnings when firms have high compensation committee quality. Compensation committee quality is constructed by a multidimensional measure of compensation committee quality choosing from nine potential, individual measures of compensation committee quality. The results show that executive cash compensation is more positively associated with accounting earnings when firms with scholar directors, a higher proportion of senior directors, a higher proportion of directors who are CEOs of other firms sitting on their compensation committee, and a higher proportion of directors, appointed during the tenure of the incumbent CEO sitting on compensation committees. Findings in this paper imply that shareholders and directors should be concerned about the composition of compensation committees as this paper finds that compensation committee quality varies depending on individual director profession and other characteristics of the committee members.