1
補助優秀新進教師暨研究人員學術研究計畫 成果報告
年度編號: 1020014 系所: 會計學系(所) 申請人: 郭啟賢 計劃名稱:
Remuneration Committee, Board Independence and Top Executive Compensation
薪資報酬委員會、董事會獨立性及高階經理人薪資
2 1. Introduction
The purpose of this study is to examine the role of the remuneration committee
(RC) in determining top management pay. Few issues have attracted as much
discussion as executive compensation in the last decade. Much of the concerns
centered around this issue have been mainly focused on executive pay being viewed
as extravagant, unconnected with firm performance and in general not liable to
sufficient scrutiny and discipline of boards of directors. Prior studies have
documented evidence supporting that there is a positive relation between chief
executive officer (CEO) compensation and firm market-based performance (e.g.,
Jensen and Murphy, 1990; Hall and Liebman, 1998). However, these studies used
data mainly from the U.S., where compensation committees have been functioning
well. In this study, we investigate these issues by considering some empirical
evidence from Taiwan.
Compared with U.S. firms, Taiwanese firms tend to have weaker corporate
governance structure and higher family control and ownership concentrations (e.g.,
Yeh et al., 2001). A number of companies are managed in the form of corporate
conglomerates, thereby structuring a complicate web of cross-holdings, which easily
leads to agency conflicts between controlling and minority shareholders. As is
evident by the separation of cash flow rights from control rights, the controlling
3
shareholders in Taiwanese firms tend to expropriate private interests by appointing
family or affiliated board members on the board (e.g., Yeh and Woidtke, 2005).
To address the public’s concerns regarding the effectiveness and reasonableness
of top executive pay, the legislative body of Taiwan amended the Securities and
Exchange Law on November 24, 2010 to require that all listed companies establish
RCs.
1Subsequently, the Financial Supervisory Committee (FSC) announced the
“Regulations on the Establishment of Remuneration Committee, and the Exercise of
its Authority by listed Companies” (hereafter, the Regulations) which came into
effect on March 18, 2011. Under the newly promulgated Regulations, a listed
company with pain-in capital above New Taiwan Dollars (NTD) $10 billion (i.e.,
USD $0.3 billion) was required to install RCs by September 30, 2011, while those
with paid-in capital under NTD $10 billion were required to complete the
installation by December 31, 2011. We summarize the timeline of rules governing
the setup of RCs in Figure I.
[Insert Figure I around here]
1 According 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.
4
The absence of compensation committees should be a minor issue since the
boards are appointed to act on behalf of the shareholders to monitor and discipline
top executive compensation. This is particularly the case if firms have previously
appointed independent directors on their boards. According to the Securities and
Exchange Act of Taiwan, listed companies may elect to appoint independent
directors in accordance with their articles of incorporation. However, about 700 (or
50%) of the listed firms do not adopt independent directors because this rule is not
mandatorily applied to all firms. This setting provides researchers a chance to assess
the differential effect of the 2011 mandatory Regulation on top management
remuneration policies existing between firms with and without the appointment of
independent directors. The purpose of the establishment of an RC is to strengthen
the reasonableness and effectiveness of executive compensation structure; thus, it is
timely and of interest for practitioners and regulators to understand if the
establishment of RCs can effectively discipline top executive compensation policies.
We find CEOs of firms that have not appointed independent directors have
greater levels of annual pay than is the case for firms that have done so, after
controlling for the effect of CEO pay determinant variables. Second, we find CEO
pay for RC early adopters to be more tightly associated with firm performance.
Third, we find that the establishment of RCs may lower CEO pay and enhance the
5
pay-performance relation, in particular, for firms that have not appointed
independent directors; however, this effect is insignificant.
The possible contributions of this study are twofold. First, we provide further
evidence on the effects of corporate governance reforms, and such analyses allow an
international comparison and evaluation of the findings from other extant studies.
Second, this study covers a period during which the authorities with responsibility
for board independence reforms adopt an approach of gradual enforcement. This
unique and natural setting allows Taiwanese companies to use considerable
discretion as to whether they choose to voluntarily appoint independent directors on
their boards. Thus, researchers can assess the effectiveness of this regulatory reform
by comparing the incremental monitoring function driven by the installment of RCs
beyond that of the independent directors with that derived solely from the
establishment of RCs in firms that have not appointed independent directors.
The remainder of this paper is organized as follows: Section 2 discusses board
independence policy reforms in Taiwan with a particular focus on the regulatory
changes, relevant theories in the existing literature and hypotheses formulation.
Section 3 presents the methodology. Section 4 describes the data. Section 5
documents and discusses the empirical findings. Section 6 concludes this paper.
2. Prior studies and hypothesis development
6
Designed to strengthen board independence, the 2002 amended Securities and
Exchange Act of Taiwan requires a firm first filing for listing to appoint independent
directors. Subsequently, the 2006 amended Securities Exchange Act (Article 14-2)
further stipulates that financial institutions and listed firms with paid-in capital of
NTD $50 billion (USD $1.6 billion), as well as newly listed firms, are required to
appoint independent directors. However, since this board reform is not mandatorily
applied to all firms, about 700 (or 50%) of the listed firms actually do not appoint
independent directors.
2The board of directors is deemed a crucial corporate governance mechanism
(Fama and Jensen, 1983). One primary function of the board is to determine the
structure and level of top management pay (e.g., Jensen, 1993; Tosi et al., 1997).
Ideally, the “Boards should appoint remuneration committees, consisting wholly or
mainly of non-executive directors and chaired by a non-executive director, to
recommend to the board the remuneration of executive directors in all its forms,
drawing on outside advice as necessary. Executive directors should play no part in
decisions on their own remuneration” (Cadbury, 1992).
32 Sources: Liu, W.-C. “Are you ready for remuneration committee?” (2011) Taiwan Corporate Governance Association (TCGA). http://www.cga.org.tw
3 Relatedly, the Greenbury Committee (Greenbury 1995) 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
7
Independent or non-executive directors have incentives to signal their managerial
competence to other potential employers. Further, they often already have expertise
related to monitoring a top management team and thus are experts in internal
organizational control (e.g., Fama and Jensen, 1983; Daily et al., 1998). Therefore,
the level of board independence plays a major role in the effectiveness of executive
compensation in regard to reducing the agency problem (e.g., Rosenstein and Wyatt,
1990; Conyon et al., 1998; Daily et al., 1998; Newman and Mozes, 1999; Mishra
and Nielsen, 2000; Vafeas, 2003) and positively relates to constraints on managerial
influence (Boone et al., 2007).
On the other hand, others have argued that outside directors could be ineffective
in monitoring top management because they, in general, hold only a small fraction
of ownership and financial stakes, which could dampen their monitoring capacity
(e.g., Finkelstein and Hambrick, 1996; Conyon and Peck, 1998). Further, the
independence of non-executives could be weakened if they are appointed by a CEO
or previous members of the firm management team (Conyon and Peck, 1998; Cohen
et al., 2010).
4Moreover, Anderson and Bizjak (2003) argued that insiders may
majority-independent boards. The NYSE also requires entirely independent compensation committees.
The NASDAQ rules are similar, while more flexible, than the NYSE (e.g., Daily et al., 1998; Linck et al., 2008).
4 However, this position does not necessarily imply an association between affiliated or interdependent RC members and CEO compensation (Daily et al., 1998; Newman and Mozes, 1999).
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 (Daily et al., 1998).
8
provide a beneficial monitoring function since they may better understand the social
and political aspects of a firm that are useful for compensation advisors in regard to
structuring incentives. Congruent with their argument, Anderson and Bizjak (2003)
found that an increase in board independence has little impact on pay levels.
Taken together, prior studies offer no uniform evidence as to whether greater
levels of board independence contribute to more efficient managerial pay contracts.
However, if overly high top executive pay is related to agency problems driven by
the separation of ownership from control, we expect to observe that firms with an
executive-dominated board will tend to have higher levels of top managerial pay.
Based on the above arguments, we formulate the first hypothesis in the alternative
form as follows:
H1: Top executive compensation levels will be relatively higher in firms that choose not to voluntarily adopt independent directors.
In Taiwan, even after posting consecutive losses, some companies with insider-
dominated boards continue to award their top executives huge compensation
packages. Thus, the main purpose of the mandatory adoption of RCs is to preclude
inefficient design of managerial pay contracts of this kind (Perry and Zenner, 2001).
The intent behind the policy reform is to prevent top executives playing any role in
the determination of their own compensation, which may not be commensurate with
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shareholder interests. Accordingly, the installation of RCs potentially may have an
important positive impact on the exercise of board control (Conyon et al., 1998).
However, some prior studies have provided an alternative view as to the
effectiveness of RCs. For example, O’Reilly et al. (1988) found that the average pay
for RC members positively affects the level of CEO pay. They interpreted these
results as being consistent with the social comparison theory perspective.
Furthermore, Ezzamel and Watson (1997) found that relatively underpaid executives
may enjoy a pay raise; however, no equivalent downward modification occurs in the
case of overly paid executives. Based on their findings, they proposed a “bidding up”
hypothesis. Namely, it was suggested that both executive and non-executive
directors sit on each other’s RCs and thereby bid up executive pay. Similarly, Main
and Johnston (1993) found that executive pay is significantly higher in firms
adopting RCs.
In Taiwan, concerns expressed by the popular press related to excessive CEO pay
have greatly caused popular awareness of the “fat cat” issue. This led to the recent
regulatory and policy reforms. Such strengthened scrutiny of executive directors,
coupled with scrutiny of CEO compensation, could lessen any director intent to
award excessive compensation. Accordingly, this leads us to expect the executive
compensation for firms previously failing to adopt independent directors on their
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boards to become lower after the mandatory requirement of RCs. Thus, we
formulate the second hypothesis in the alternative form as follows:
H2: Compared to that of firms with voluntarily appointed independent directors, the top executive compensation for firms currently without appointment of independent directors is expected to become lower to a greater extent after the mandatory enforcement of RCs.
Prior studies have suggested that regulatory intervention by governance may
effectively change compensation behavior. For example, Perry and Zenner (2001)
and Vafeas (2003) found firms to have reduced salaries in response to compensation
disclosure and tax reform and pay-performance sensitivity to accordingly be
increased for the firms most likely to be affected.
5In addition, using a separation of
tasks and functions framework, Laux and Laux (2008) found pay-performance
sensitivity to be higher when the RC sets the CEO pay, and the audit committee
monitors the financial reporting, rather than when the board as a whole handles both.
Relatedly, Sun et al. (2009) found future firm performance to be more positively
associated with stock option grants as RC quality increases. Furthermore, Mace
(1986) argued that outside directorships are considered to be valuable since they
provide executives with prestige, visibility, and commercial contacts. This line of
argument suggests that companies, with an objective to increase their value, will
5 Moreover, Young (2000) suggested that the increasing use of non-executive directors has a positive impact on U.K. board structure and governance arrangements.
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have a demand for independent directors to serve on their boards (Jiraporn et al.,
2009). This positive value effect may be attributable to their expert advisory, actual
monitoring and probably a favorable signaling effect. This reputation view can be
found to be supported in a number of studies. For example, Gilson (1990) found the
number of outside directorships to be associated with firm performance in the case
of financially distressed firms. Kaplan and Reishus (1990) found the number of
independent directors to be related to dividend cuts.
On the contrary, Anderson and Bizjak (2003) contended that the above-
mentioned regulations do enhance RC independence but found no evidence to
support the premise that the presence of insiders on RC weakens pay-performance
sensitivity.
In Taiwan, the government policy reform mandates the establishment of RCs,
composed of only independent directors and thereby is expected to serve as a
supplementary measure and positive force to strengthen the pay-performance
relation for such firms. Therefore, we formulate the third hypothesis in alternative
form as follows:
H3: The pay-for-performance relation strengthens after the mandatory
enforcement of RCs.
12
The effect of outside directors and board monitoring functions is not only on the
level of pay. A crucial role of a non-executive director-dominated board is to design
an effective pay contract so that top managers have an incentive to work in line with
shareholder interests (e.g., Conyon et al., 1998; Newman and Mozes, 1999).
Consistent with this view, Mishra and Nielsen (2000) found a positive relation
between the percentage of independent outside directors and CEO pay-performance
sensitivity. Moreover, Ryan Jr. et al. (2004) found independent directors to have a
bargaining advantage over CEOs that results in compensation more closely aligned
with shareholder objectives.
Conversely, an alternative view contends that insiders could be more motivated
to exert managerial control since their reputation as decision-makers largely depends
on the quality of their compensation policy. Additionally, insiders could own an
informational advantage over nonexecutives in assessing both firm strategy and the
economic environment. As such, insiders could be in a better position to establish
more efficient pay arrangements (Vafeas, 2003). Consistent with this view,
Anderson and Bizjak (2003) found RC independence to have no significant effect on
the pay-performance association and therefore concluded that the regulations impose
regulatory and firm specific costs without offsetting benefits.
13
Given the mixed results provided by the prior literature on this topic, whether RC
installation for firms previously without the appointment of independent directors
can positively affect the pay-for-performance relation appears to be an empirical
question. We therefore list the fourth hypothesis in the alternative form as follows:
H4: The pay-performance relation becomes closer to a greater extent after the mandatory adoption of RCs for firms appointing no independent directors.
If the lack of mandatory RC requirement hampers effective monitoring of
executive compensation, companies with the least efficient compensation packages
could be most resistant to the introduction of RCs because these firms are the ones
that will experience the most adverse reaction from the financial media and
shareholders when their undue remuneration policies are made public. As such, we
expect such companies to have the strongest motives to delay the setting up of RCs
until the last possible moment. By contrast, companies that choose to install RCs
early appear a priori to be least affected by the new rule. Therefore, we formulate
the third hypothesis in alternative form as follows:
H5: Companies that voluntarily install RCs early will exhibit a closer pay- performance relation than will be the case for firms that delay the establishment of RCs until they are absolutely required to do so.
3. Methodology
14
To address the first research question, we express the level of CEO compensation
as a function of firm-specific corporate governance structures, economic factors and
ownership structures (e.g., Smith and Watts, 1992; Core et al., 1999), listed as
follows:
ln (CEO_Comp
i,t) = β
0+ β
1Ret
i,t+ β
2Roa
i,t+ β
3Firm_Size
i,t+ β
4Market-to-Book
i,t+ β
5Stdev_Ret
i,t+ β
6Stdev_Roa
i,t+ β
7CEO_Chair
i,t+ β
8Board_Size
i,t+ β
9CEO_Ownership
i,t+ β
10Dir_Ownership
i,t+ β
11Large_Ownership
i,t+ β
12Non_IndDir
i,t+ ∑(I=2 to 27) θ
IIndustry_dummies + ε
i,t(1)
Annual CEO pay (CEO_Comp) includes cash compensation, other special
allowances, cash bonuses, and stock bonuses. According to the rule, firms disclose
only the upper and lower bounds of annual CEO compensation, and the actual dollar
amount of CEO pay is unavailable. For regression analysis purposes, we use the
midpoint of the disclosed CEO annual salary range. We then transform
compensation data into its logarithm. Economic determinants of CEO compensation
include firm performance, firm size, growth potential, and risk (e.g., Smith and
Watts, 1992; Elloumi and Gueyie, 2001).
To measure firm performance, we use annual stock return (Ret) and return on
asset (Roa). Further, firm size (Firm_Size) is measured by the natural logarithm of
15
net sales (Core et al., 1999). Next, Market-to-Book is the market value of equity
divided by the book value of equity, serving as a proxy for growth opportunity (e.g.,
Lambert and Larcker, 1987; Smith and Watts, 1992). Further, we use both standard
deviations of stock returns (Stdev_Ret) and standard deviations of return on assets
(Stdev_Roa) for the past five years to capture firm risk.
Moreover, we include in the regression two corporate governance variables,
CEO duality (CEO_Chair) and board size (Board_Size) to control for the effect of
corporate governance structure on executive pay. CEO_Chair is a dummy, equal to
one if the CEO is the chair of the board. Board_Size is the number of directors
sitting on the board. Further, we add three ownership structure variables to our
regression, including CEO ownership (CEO_Ownership), inside director ownership
(Dir_Ownership) and ownership concentration (Large_Ownership).
CEO_Ownership is the number of shares held by a CEO divided by the total number
of shares outstanding. Dir_Ownership is the number of shares owned by insider
directors divided by the total number of shares outstanding. Lareg_Ownership is the
number of shares held by shareholders whose holdings are more than 5% of the
firm’s shares divided by the number of shares outstanding. Further, i and t denote
CEOs and years, respectively. Lastly, we add to the regression a dummy variable,
Non_IndDir, which equals one if firms have not voluntarily appointed independent
16
directors on the board, and zero otherwise. An observed significant positive β
12will
support H1.
To test H2, we formulate regression (2) as follows:
ln (CEO_Comp
i,t)= β
0+ β
1Ret
i,t+ β
2Roa
i,t+ β
3Firm_Size
i,t+ β
4Market-to-Book
i,t+ β
5Stdev_Ret
i,t+ β
6Stdev_Roa
i,t+ β
7CEO_Chair
i,t+ β
8Board_Size
i,t+ β
9CEO_Ownership
i,t+ β
10Dir_Ownership
i,t+ β
11Large_Ownership
i,t+ β
12Non_IndDir
i,t+ β
13RC_Setup
i,t+ β
14Non_IndDir
i,t× RC_Setup
i,t+ ∑(I=2 to 27) θ
IIndustry_dummies + ε
i,t(2)
We add an additional dummy, RC_Setup, to the regression. RC_Setup equals
one if year is 2011, and zero otherwise. An interaction term RC_Setup ×
Non_IndDir is also added to the regression. An observed significant negative β
14is
consistent with H2.
To test H3, we formulate regression (3) as follows:
ln (CEO_Comp
i,t) = β
0+β
1Ret
i,t+β
2Roa
i,t+β
3Firm_Size
i,t+β
4Market-to-Book
i,t+β
5Stdev_Ret
i,t+β
6Stdev_Roa
i,t+β
7CEO_Chair
i,t+β
8Board_Size
i,t+β
9CEO_Ownership
i,t+β
10Dir_Ownership
i,t+β
11Large_Ownership
i,t+β
12RC_Setup
i,t+ β
13Ret
i,t× RC_Setup
i,t+ ∑(I=2 to 27) θ
IIndustry_dummies + ε
i,t(3)
We include an interaction term Ret × RC_Setup to the regression. An observed
significant positive β
13is consistent with H3.
17
To test H4, we formulate regression (4) as follows:
ln (CEO_Comp
i,t) = β
0+β
1Ret
i,t+β
2Roa
i,t+ β
3Firm_Size
i,t+ β
4Market-to-Book
i,t+ β
5Stdev_Ret
i,t+ β
6Stdev_Roa
i,t+ β
7CEO_Chair
i,t+ β
8Board_Size
i,t+ β
9CEO_Ownership
i,t+ β
10Dir_Ownership
i,t+ β
11Large_Ownership
i,t+ β
12Non_IndDir
i,t+ β
13RC_Setup
i,t+ β
14Ret
i,t× RC_Setup
i,t× Non_IndDir
i,t+ ∑(I=2 to 27) θ
IIndustry_dummies + ε
i,t(4)
We include an interaction term Ret × RC_Setup × Non_IndDir to the
regression. An observed significant positive β
14is consistent with H4.
To test H5, we formulate regression (5) as follows:
ln (CEO_Comp
i,t) = β
0+ β
1Ret
i,t+ β
2Roa
i,t+ β
3Firm_Size
i,t+ β
4Market-to-Book
i,t+ β
5Stdev_Ret
i,t+ β
6Stdev_Roa
i,t+ β
7CEO_Chair
i,t+ β
8Board_Size
i,t+ β
9CEO_Ownership
i,t+ β
10Dir_Ownership
i,t+ β
11Large_Ownership
i,t+ β
12RC_EarlyAdopter
i,t+ β
13Ret
i,t× RC_EarlyAdopter
i,t+ ∑(I=2 to 27) θ
IIndustry_dummies + ε
i,t(5)
We add a new variable RC_EarlyAdopter, equal to one if the firm is an early
adopter of RC, and zero otherwise, and an interaction term Ret × RC_EarlyAdopter
is also added to the regression. An observed significant positive β
13is consistent
with H5.
18 4. Data
The sample includes firms listed in the Taiwan Stock Exchange (TSE), Over-
the-Counter (OTC) and Emerging Stock (ES) markets at the 2011 fiscal year-end.
We collect financial and stock return data for the 2008-2011 period, covering three
years prior to and one year after the mandatory enforcement of RC installation. The
initial data consists of 1,734 firms, representing 6,936 observations. We exclude
from our dataset 48 firms or 192 firm-year observations within the financial industry,
e.g., banking, insurance companies and regulated industries. We collect CEO
compensation data from sample firm annual reports. We delete 811 firm-year
observations due to missing CEO annual pay data. In addition, we delete 1,106
observations because the firm historical annual stock returns needed to calculate
standard deviations or annual stock returns for the current year are missing. Further,
37 observations are deleted because of missing net sales. We also delete 43
observations due to missing CEO ownership data. The final data set used to test our
hypotheses includes 4,747 firm-year observations, representing 1,311 distinct firms.
Table 1 summarizes the sample selection procedure.
[Insert Table 1 around here ]
Table 2 summarizes the descriptive statistics of all variables used in the study.
The average dollar amount of the upper (lower) bound of annual CEO pay
19
(CEO_Comp) is NT$ 6.97 (NT$ 3.08) million. Further, the mean of the midpoint
CEO compensation is NT$ 5.03 million and the first (third) quartiles of the average
CEO_Comp are NT$ 1.42 (NT$ 7.50) million.
6As shown in Table 2, the mean of annual stock return (Ret) and return on
assets (Roa) are 23.98% and 3.43%, respectively. Standard deviations of these two
variables suggest that Ret demonstrates greater deviation then Roa over the sample
period, which is more than ten times that of Roa. Next, the average natural logarithm
of net sales (Firm_Size) is 14.66, representing an average net sales of NT$ 12.5
million. The mean (median) of market value to book value of equity (Market-to-
Book) is 1.58 (1.22), indicating that sample firms on average demonstrate growth
potential. In addition, the standard deviations of Ret and Roa for the past five years
are 74.89% and 5.87%, respectively.
[Insert Table 2 around here ]
Furthermore, the mean of CEO_Chair is 0.31, suggesting that nearly one-third
of CEOs also serve as Chairman of the Board. Next, the average number of directors
sitting on the board is 6.83, and the median is 7. In addition, the average holdings of
CEOs are 3.21%. The mean of director ownership (Dir_Ownership) and large
6 Untabulated 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.
20
shareholder ownership (Large_Ownership) are 20.53% and 19.81%, respectively.
Finally, the mean of Non_IndDir is 0.51, meaning that on average half of the sample
do not have independent directors sitting on their boards.
5. Empirical findings
To answer the first research question, we run equation (1) and document the
results in Table 3. The coefficient on Non_IndDir is 0.07 (t=3.07), which is
significant at the 1% significance level. This result suggests that CEO annual
compensation is relatively higher for firms that voluntarily choose not to appoint
independent directors, consistent with H1. It should be noticed that the coefficient
estimates on risk variables (i.e., Stdev_Ret and Stdev_Roa) are negative; however,
they are insignificant. Other control variables, including firm performance, firm size,
growth potential, corporate governance and ownership variables have the expected
signs and are consistent with prior studies.
The fourth column documents the results from Equation (2). We find the
coefficient on Non_IndDir × RC_Setup to be negative (-0.01, t=-0.24), which is
consistent with H2, but it is insignificant.
[Insert Table 3 around here ]
The test results for H3 are shown in the 5th column of Table 3. The coefficient
estimate (t-statistics) on Ret × RC_Setup is 0.001 (t=1.11). The result indicates that
21
the association between CEO pay and stock return (i.e., pay-performance sensitivity)
enhances after the setup of remuneration committees, but the impact is insignificant.
To test whether the pay-performance relation becomes closer to a greater
extent after the mandatory adoption of RCs for firms appointing no independent
directors (H3), we run equation (4) and report the results in the 6th column of Table
3. The coefficient on Non_IndDir × Ret × RC_Setup is 0.001 (t=0.75), which shows
an expected but insignificant positive sign. This finding suggests that RCs have a
positive impact on the pay-performance association for firms without independent
directors sitting on their boards; however, the impact is insignificant.
Lastly, equation (5) is run and the results are provided in the last column of
Table 3. The coefficient estimate on Ret × RC_EarlyAdopter is 0.003 (t=2.81),
which is significant at the 1% level. This finding indicates that the pay-performance
association for companies that voluntarily install RCs early becomes closer to a
greater extent than firms that delay the establishment of RCs until they are
absolutely required to do so, which is consistent with H5.
6. Conclusions
The purpose of this paper is to investigate the role of remuneration committee
in determining CEO annual pay. Four research issues are addressed in this paper:
first, whether CEO annual pay is higher for firms that do not appoint independent
22
directors. Second, if the answer to the first question is "Yes", we examine whether
the setting up of RCs can mitigate this issue. Third, we test if the establishment of
RCs can align CEO pay and firm performance to any great extent. The forth
question is whether the establishing of RCs can enhance the pay-performance
association to a greater degree for firms that do not appoint independent directors.
Finally, we investigate if early adopters of RCs demonstrate a tighter pay-
performance relation.
The findings are summarized as follows: First, we find that CEOs of firms that
do not appoint independent directors do have a greater level of annual pay than that
of firms that have appointed independent directors, after controlling for the effect of
CEO pay-determinant variables. Second, we find that CEO pay in the case of early
adopters of RCs is more closely related to firm performance. Third, we find that the
setting up of RCs may decrease CEO pay and enhance the pay-performance
association, in particular for firms that have not appointed independent directors;
however, the effect is not found to be statistically significant.
23 References
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26 Figure I
Timeline of regulations for the remuneration committee (RC)
2010 2011
|_________________________________|__________________________________|
“Regulations on the Establishment of
Remuneration Committee, and the Exercise of Its Authority by Listed Companies” (the Regulations) came into effect on March 18, 2011.
77 PwC Taiwan pointed out that out of 1,300 listed firms in Taiwan, only 22 (less than 2%) have established RC or special committee with equivalent functions.
Source: http//www.pwc.com/tw/en/news/press-release/press-20110322.jhtml.
