Compensation committee composition and CEO compensation – Finnish evidence

Abstract

PURPOSE OF THE STUDY The purpose of this study is to examine the effect of compensation committee composition on the level of CEO compensation. The composition of the compensation committee is analyzed by using five variables which are: 1) the proportion of non-independent directors, 2) the proportion of long-serving directors, 3) the proportion of CEO-directors, 4) the proportion of busy directors and 5) the presence of a blockholder on the compensation committee. CEO compensation is measured by using three instruments which are base salary, cash compensation and total compensation.

DATA Data set consists of the companies that were listed on the NASDAQ OMX Helsinki in September 2011 and used a compensation committee in their internal governance at some point between 2006 and 2009. After the necessary eliminations the final sample comprised of 177 firm-year observations. All the independent variables are from the years 2006-2009, while the dependent variable is from the years 2007-2010.

RESULTS The results point out that the proportion of non-independent directors has a statistically highly significant negative effect on the level of CEO base salary and CEO cash compensation. The proportion of long-serving directors has a statistically significant negative effect on CEO cash compensation and especially on total CEO compensation. Finally, the proportion of busy directors has a statistically significant negative relationship with CEO base salary. The proportion of CEO-directors and the presence of a blockholder on the compensation committee have no statistically significant relationship with CEO compensation.