An Empirical Examination of the Role of the CEO and the Compensation Committee in Structuring Executive Pay

Motivated by the potential for opportunistic behavior in pay decisions, recent SEC and IRS regulations essentially preclude inside directors from serving on a firm's compensation committee. We examine whether greater compensation committee independence promotes shareholder interests and whether the CEO's presence on the compensation committee leads to opportunistic pay structure. We find little evidence that greater committee independence affects executive pay. Moreover, committees consisting of insiders or the CEO do not award excessive pay or lower overall incentives. For example, we find no evidence that pay decreases or total incentives increase when CEOs come off the compensation committee. Our results suggest that regulations governing committee structure may not reduce levels of pay or achieve efficiencies in incentive contracts