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http://ssrn.com/abstract=887492
 
 

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Board Committees, CEO Compensation, and Earnings Management


Christian Laux


Vienna University of Economics and Business Administration

Volker Laux


University of Texas at Austin - Department of Accounting

February 2008


Abstract:     
We analyze the effect of committee formation on how corporate boards perform two main functions: setting CEO pay and overseeing the financial reporting process. The use of stock-based pay schemes induces the CEO to manipulate earnings, which leads to an increased need for board oversight. If the whole board is responsible for both functions, it is inclined to provide the CEO with a compensation scheme that is relatively insensitive to performance in order to reduce the burden of subsequent monitoring. When the functions are separated through the formation of committees, the compensation committee is willing to choose a higher pay-performance sensitivity, as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.

Number of Pages in PDF File: 43

Keywords: Corporate Governance, Executive Compensation, Earnings Management, Board Oversight

JEL Classification: M41, G34, J33

working papers series


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Date posted: March 3, 2008 ; Last revised: March 4, 2008

Suggested Citation

Laux, Christian and Laux, Volker, Board Committees, CEO Compensation, and Earnings Management (February 2008). Available at SSRN: http://ssrn.com/abstract=887492 or http://dx.doi.org/10.2139/ssrn.887492

Contact Information

Christian Laux
Vienna University of Economics and Business Administration ( email )
Welthandelsplatz 1
Vienna, Wien 1020
Austria
Volker Laux (Contact Author)
University of Texas at Austin - Department of Accounting ( email )
Austin, TX 78712
United States
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