SOX Generated Changes in Board Composition: Have They Impacted CEO Compensation?
Timothy Gordon Coville, The Peter J. Tobin College of Business, Department of Accounting and Taxation
Concern over the size and composition of executive compensation packages awarded to Chief Executive Officers (CEOs) has been with us for decades. Recent accounting and risk management scandals have heightened mistrust of management, which in turn may increase pressure to reduce the value of, or alter the composition of, the executive compensation packages awarded. Boards of directors and their compensation committees control these annual decisions over the value and composition of their CEO’s compensation package. Were the 2002 legal and regulatory responses to corporate financial reporting scandals, which came in the form of many new initiatives and requirements on all firms, relevant to subsequent compensation package decisions? That question is investigated by first noting that the impact of these new requirements differed between firms. Some firms had already introduced the use of independent directors and fully-independent committees prior to their being made compulsory in 2002. This investigation examines the effect on CEO compensation packages for listed firms attributable to the Sarbanes-Oxley Act of 2002, and concurrent changes in the stock exchange regulations, that compelled increased use of independent directors and fully-independent committees. The analysis also advances the study of effects associated with the use of independent directors, as it employs the difference-in-differences methodology to overcome endogeneity concerns. Results are obtained through examination of the effects on CEO compensation packages associated with the exogenously forced addition of independent directors to the boards of publicly listed firms. The results reveal that firms that were compelled by law to change their boards increased the performance linked components of their CEOs compensation packages more than did firms that had pre-adopted the Sarbanes-Oxley corporate board composition requirements. The 2002 legal and regulatory responses appear then to be relevant to subsequent CEO compensation packages, in a manner favored by shareholders.