Size Matters: The link between CEO Remuneration, Firm Size and Firm Performance Moderated by Remuneration Committee Independence

Abstract

This study examines the interactive relations between CEO remuneration, firm size and firm performance moderated by remuneration committee (RC) independence. Requested by the Australian Government and to appease public outrage about excessive executive pay, a Productivity Commission report has recommended mandatory independent RCs comprising all non executive directors (NEDIRs) to control executive compensation. An OLS regression tests a high order, three-way interactive hypothesis investigating how CEO total pay and CEO bonuses relates to firm size (large, medium and smaller) and firm performance (ROA), moderated by remuneration committee independence at 3 levels using data from 123 ASX 300 Australian company 2001 reports. Results indicate that RCs with 100% NEDIR membership are not universally effective when firm size and firm performance are taken into account for our sample. Large firms' CEO total remuneration is moderated by RCs but more strongly when those committees comprise 100% NEDIRs. Smaller and medium firms' committees appear to be ineffective in controlling CEO total pay no matter how independent the committee is. CEO bonuses paid by large and medium firms are strongly moderated when their RCs comprise 100% NEDIRs and marginally effective when those committees comprise 70-90% NEDIRs. We find CEO bonuses are not moderated by large and medium firms' RCs with less than 100% NEDIRs. Smaller firms' RCs fail to moderate their CEO bonuses no matter how independent the committee composition. Our study contributes towards public policy as our evidence suggests that the Productivity Commission's (2009) recommendation to mandate independent RCs comprising all NEDIR is not universally effective for controlling CEO compensation when size and performance is taken into account. Limitations include focus on one year's (2001) annual reports as well as other important factors not included in our models.