DO FIRMS BENEFIT FROM THE COMPENSATION COMMITTEE MANDATE IN TAIWAN?
Date Issued
2015
Date
2015
Author(s)
Pan, Chao-Jung
Abstract
Article 14-6 of the amended Securities Exchange Act of Taiwan was passed in November of 2010 and mandated that a firm whose stock is listed on the stock exchange or traded over-the-counter shall establish a compensation committee. Regulators in Taiwan claim that this mandate can enhance the transparency of executive compensation, mitigate the “fat cat” phenomenon, and pay executives in line with firm performance and shareholder interests. Thus, this dissertation is divided into two parts to investigate whether this optimistic expectation of the regulators occurs as expected. Part I of this dissertation examines whether this mandate can benefit firms by enhancing pay-for-performance sensitivity of executive compensation as a whole and what are the channels of this mandate. To address the research questions, this dissertation uses Taiwanese-listed firms during the periods 2009 to 2010 and 2012 to 2013 as the sample. The independence and the competence of the compensation committee are considered to be the two channels which make the compensation committee mandate efficacious. The independence of the compensation committee is estimated by the compensation committee with incumbent independent directors. The competence of the compensation committee is estimated by the human and social capital of the members (i.e., long board service and multiple directorships). The empirical results show that this mandate indeed increases pay-for-performance sensitivity of executive compensation. This effect is mainly via the independence and the competence of the compensation committee. Part II of this dissertation examines the extent to which firms that previously had overpayment or poor performance (generically called focal firms) benefit from this mandate and how compensation committee composition plays a role in this benefit. To address the research questions, this dissertation compares the change in the pay-for-performance sensitivity of executive compensation between focal firms and benchmark firms. Benchmark firms were less likely to overpay or to underpay or which had good performance before the mandate. The empirical results show that, compared to benchmark firms, the positive effect of this mandate on the pay-for-performance sensitivity is larger for overpaying firms and is smaller for poor-performing firms. This dissertation also finds that compensation committee members with more human and social capital and incumbent independent directors perform diverse functions in different firms. When they serve on overpaying firms that receive public scrutiny, they are more effective at increasing pay-for-performance sensitivity. Conversely, once they serve on poor-performing firms, this function vanishes.
Subjects
executive compensation
corporate governance
compensation committees
independent directors
board experience.
Type
thesis