Academic journal article International Journal of Business

Compensation Committee and Executive Compensation in Asia

Academic journal article International Journal of Business

Compensation Committee and Executive Compensation in Asia

Article excerpt

I. INTRODUCTION

There is a considerable body of research on executive compensation. A large proportion of these studies examine listed firms in United States, which requires extensive and detailed disclosures on executive compensation such as the individual compensation data for the top executives. However, outside United States, many countries do not mandatorily require firms to provide detailed disclosures on executive compensation. For example, most countries in East Asia require limited disclosure of executive compensation, resulting in the majority of firms reporting of (at most) the cash compensation for the top management with little information on individual executive compensation. In this study, using a proprietary dataset based on a compensation survey conducted by a large international consulting firm, we examine the CEO compensation of listed firms in East Asia. (1) Specifically, using a sample of listed firms in East Asia, this paper examines the association between CEO power and CEO compensation level. We also investigate whether the independence of the compensation committee and the equity ownership by external block-holders affect the compensation setting process in firms run by with powerful CEOs.

In general, there are two views of executive compensation in the literature. Under the optimal contracting view, CEO compensation arrangements are the product of arm's length contracting between the board of directors and executives, which results in compensation contracts that provide efficient incentives to reduce agency problems (Holmstrom, 1979). In contrast, under rent-seeking view, CEOs influence the design and setting of compensation contracts to personally benefit themselves, which results in greater agency problems between executives and shareholders (Bebchuk and Fried, 2003). Overall, the empirical evidence on the executive compensation is mixed. Some studies provide evidence supporting the optimal contracting view (Oyer, 2004; Rajgopal, Shevlin, and Zamora, 2006; Gabaix and Landier, 2008; Kaplan and Rauh, 2010). Other studies provide evidence that CEOs exercise substantial influence over the executive compensation process resulting in wealth transfer from shareholders to managers (Core, Holthausen, and Larker, 1999; Hartzell and Starks, 2003; Bebchuk and Fried, 2004).

We posit that in East Asia, powerful CEOs have the incentives and ability to engage in private rent seeking over the compensation setting process for at least three reasons (Section II.A contains more details). First, the regulations in many countries in East Asia do not explicitly mandate detailed disclosure of top executives' compensation. Thus, the less stringent disclosure requirements on executive compensation provide an opportunity for powerful CEOs to use executive compensation as a rent-seeking mechanism. Second, CEOs in East Asia may face lower disciplinary forces from the managerial labor market (Klapper and Love, 2004; Lee, 2007). Third, in East Asia, the information environment is opaque because monitoring by external analysts is weak (Lang, Lins, and Miller, 2004). Thus, in these countries, the likelihood of entrenched CEOs' compensation attracting external scrutiny by analysts and is likely to be low.

Following prior studies (Adams, Almeida, and Ferreira, 2005; Rosentein and Wyatt, 1990; Shivdasani and Yermack, 1999), we measure CEO power with CEO- chairman duality, the proportion of insider directors on the board and the percentage of directors on the board appointed during the CEO tenure (2). Using a sample of firms in East Asian economies, we find that the level of CEO compensation is positively associated with CEO power. In other words, after controlling for the economic determinants of executive compensation, we find that more powerful CEOs receive higher compensation level. This result is robust across several measures of CEO power such as CEO-chairman duality, the proportion of insider directors on the board and the percentage of directors appointed during the CEO tenure. …

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