Remuneration committee characteristics, effectiveness and regulatory reform

This thesis examines the role of the remuneration committee (RC) in improving Chief Executive Officer (CEO) performance-related compensation, and the effect of RC regulatory reform on companies’ governance practices. The study provides evidence on corporate governance characteristics that define an effective RC—one that designs an optimal CEO compensation package. Further, the findings also indicate that the listing rule reform regarding the RC enhances companies’ concern about their effective governance. Two empirical studies are presented to answer these research questions. The first empirical study examines the impact of a broad set of RC characteristics on CEO compensation. An effective RC is usually defined by its independence from management. On this basis, I evaluate an RC’s ability to design a CEO compensation package that provides incentives for management to improve firm performance. Instead of focusing on remuneration committee independence only, this study evaluates four groups of characteristics of an RC—monitoring, involvement, expertise and close ties to the CEO—and relates these characteristics to CEO performance-related compensation. The results suggest that involvement and expertise are important, whereas close ties do not affect CEO compensation as expected. The implications from this study are that shareholders and directors should be concerned about a range of characteristics when selecting RC members, and that regulators should expand the definition of an effective RC beyond independence from management. The second empirical study examines whether the enactment of a new Australian Securities and Exchange (ASX) listing rule regarding the RC, targeted at ASX300 firms, motivates non-ASX300 firms to adhere to this rule. I further investigate how this new regulation affects both ASX300 and non-ASX300 firms’ compliance with ASX recommendations on corporate governance practices regarding RCs. The analysis shows that the mandatory requirement only affects non-ASX300 firms that have already formed an RC, and that it motivates both ASX300 and non-ASX300 firms to further improve RC quality as recommended by the ASX Corporate Governance Council. These results support the view that companies not subject to a mandatory regulation still follow that regulation to adhere to its purpose. I find that all companies are now more sensitive to the concerns of RC governance advocates and have taken actions to improve oversight of the RC following the regulatory change. Overall, the study demonstrates that the effective characteristics of an RC such as its involvement and expertise help it to design a CEO remuneration package linked to his or her performance. Further, the study also shows that the RC regulatory reform renders companies more concerned about their committee governance quality.