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Remuneration Committees and Attribution Disclosures on Remuneration Decisions: Australian Evidence

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Abstract

The use of remuneration committees (RCs) to foster corporate accountability concerning executive remuneration decisions has attracted increasing public attention following various corporate scandals and the recent global financial crisis (GFC). This study empirically examines the link between RCs and attributions disclosures, i.e. explanation of reasons for executive remuneration decisions. Using a sample of 644 firm-year observations drawn from top 200 Australian Securities Exchange (ASX)-listed firms from 2007 to 2011, we find that firms with RCs tend to voluntarily disclose attribution, and the extent of disclosures increases with remuneration committee quality. While existence of attribution disclosures is related to pay-performance sensitivity, the extent of disclosures does not show incremental effect on pay-performance sensitivity. The results also show that the presence and quality of RCs are positively associated with internal attribution disclosures regarding executive remuneration decisions during the GFC, suggesting corporate responsiveness to corporate accountability demands at times of economic crisis.

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Notes

  1. Report available at: http://www.pc.gov.au/news-media/speeches/cs20090603/cs20090603.pdf.

  2. For example, the ABC reported that executive pay appears to be structured in a manner that increases bonus pay in lieu of fixed pay and raised concerns regarding the propriety of such schemes. It particularly highlighted that 93 per cent of the executives of the top 100 companies in Australia received bonuses, and that the median of the bonus pay was a 76% bonus of the amounts on offer (31 Aug 2016, available at: http://www.abc.net.au/news/2016-08-31/australian-ceo-pay-packets-fall-but-bonuses-rise/7799656).

  3. We used Principal Components Analysis (PCA) in our RCQ index as it is a parsimonious way of capturing remuneration committee effectiveness and it reduces the measurement error associated with using individual RCQ components (Bharath et al. 2008). The unreported results are in the same directions as our main findings reported in Table 4.

  4. Clarkson et al. (2006) estimated corporate governance using a factor analysis by using four corporate governance measures: the proportion of independent directors, independent audit committee members, independent remuneration committee members and D.

  5. 29 firm-year observations are removed as these firms discuss both internal and external attributions for their remuneration change decisions.

  6. As of 1/7/2011, ASX Listing Rule 12.8 requires at the beginning of the reporting period all listed companies in the ASX 300 to establish a remuneration committee with the requirement of members being independent for the whole year.

  7. Our industry classification is based on Global Industry Classification Standard.

  8. Twenty-nine firm-year observations are removed in all analyses because they have attributed both internal and external factors for their remuneration actions.

  9. Untabulated correlation between our dependent variables and individual characteristics of remuneration committees show the significant positive correlation as expected. Also the correlation between board independence and remuneration committee independence is in line with our expectation (positively highly significant).

  10. We find consistent results when we lag RCX and RCQ by one year (see Cornett et al. 2008).

  11. The results are reported in Tables 6 and 7 in estimation 3 and 4 for external attribution.

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  1. Deakin University, 221 Burwood Highway, Burwood, VIC, 3125, Australia

    Sutharson Kanapathippillai, Dessalegn Mihret & Shireenjit Johl

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Kanapathippillai, S., Mihret, D. & Johl, S. Remuneration Committees and Attribution Disclosures on Remuneration Decisions: Australian Evidence. J Bus Ethics 158, 1063–1082 (2019). https://doi.org/10.1007/s10551-017-3736-7

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