Empirical research on the function of compensation committees: the influence of family control and professional managers

ABSTRACT

This study is intended to investigate the effect of compensation committees on executive compensation and ability. The results indicate that the quality of compensation committee strengthens the relationship between CEO compensation and ability. The results also indicate the alignment between CEO compensation and ability to be more pronounced following improvements in the quality of compensation committees in family firms, but this relationship does not existence in nonfamily firms. Furthermore, the relationship between CEO compensation and ability is found to be much stronger in the presence of better compensation committees in family firms who hire professional CEOs, but this relationship does not exist in family firms who appoint family members as the CEO. The results provide insights that may assist regulators and investors with understanding that compensation committees are not panaceas.

KEYWORDS:

• Compensation committee
• family firm
• managerial ability
• compensation
• professional CEO

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Sun and Cahan (2009) selected six characteristic variables of the compensation committee, including CEO appointed directors, long-serving directors, CEOs from other firms being compensated, directors’ shareholdings, busy outside directors, and the size of the compensation committee. After considering the laws and the availability of data from Taiwan, we use four quality characteristics (the size of the compensation committee, the frequency of meetings, member attendance rate, and the proportion of independent directors).

2. Several studies indicate that family firms are the quite common business organizations globally, for example, Taiwan, the US, Western Europe, Latin America, the Middle East and the East, and South Asia (Anderson and Reeb 2004; Fahlenbrach 2009; Kang and Kim 2016).

3. This transitional provision expired on 20 March 2014. The listed companies on the stock exchange and listed companies in the over-the-counter market must confirm that the members of the compensation committee are one-half the number held by independent directors before 30 June 2019.

4. The ultimate controller is the company’s major shareholder. The major shareholders refer to holding equity of 5% or more or the top ten shareholders in the company.

5. We recalculate compensation committee quality using the aggregate quality score from a principal component analysis of five metrics that include compensation committee size, the number of annual compensation committee meetings, member attendance rate, the percentage of independent directors, and the dummy variable of setting up the compensation committee voluntarily. VOLUNTARILY equals one if the company voluntarily sets up the compensation committee in advance, where a voluntary company is 1, otherwise it is 0.

6. The results are not tabulated here, but they are available on request.

7. As described in the first chapter, family firms are universal in East and South Asia, the Middle East, Western Europe, and Latin America (Kang and Kim 2016).