Remuneration committee independence and CEO remuneration for firm financial performance

Abstract

Purpose: As a result of the Australian Government Productivity Commission's recommendation to mandate remuneration committee independence for ASX300 companies, this study investigates whether voluntary remuneration committee independence aligns Chief Executive Officer (CEO) total pay and bonuses with firm financial performance. Design/methodology/approach: A series of hypotheses test the research question using multiple regressions for a sample of 143 ASX300 companies during 2001. This time was prior to strengthened corporate governance regulation, but after mandated executive remuneration disclosure, thus capturing varying levels of voluntary remuneration committee independence. Findings: This study shows firm size is an influential factor in the relationship under investigation. ASX300 large firm remuneration committees link CEO total remuneration and bonuses to firm financial performance. Smaller ASX firm remuneration committees do not link either type of CEO remuneration to performance despite remuneration committee independence. Findings are mixed for medium-sized ASX300 firms. Research limitations/implications: Limitations include the necessary time restriction to 2001 for sampling the ASX300 firms. The implication of this study's findings is that the proposed public policy for mandatory remuneration committee independence is not universally effective in linking CEO remuneration to performance for ASX300 firms. Originality/value: This study contributes to the limited research on voluntary remuneration committee independence in relation to CEO remuneration and firm financial performance in the Australian context. Key words: Chief Executive Officer (CEO) Remuneration, Remuneration Committee Independence, Firm Financial Performance, Firm Size