The Impact of Independent and Overlapping Board Structures on CEO Compensation, Pay-Performance Sensitivity and Earnings Management

Abstract

Due to the Sarbanes-Oxley Act (SOX), new rules that require independent directors on corporate boards and committees are likely to create overlapping board structures (when a director serves on more than one committee). The purpose of this study is to examine the effects of independent and overlapping board structures on CEO compensation, CEO pay-performance sensitivity, and accrual management. Our results support Laux and Laux (2009) that overlapping compensation committees take conservative actions by granting CEOs less equity-based compensation to reduce the monitoring cost of financial reporting. However, contrary to Laux and Laux (2009), we do not find that overlapping compensation committees have any effect on CEO pay-performance sensitivity. Furthermore, our results show that SOX might reduce risk taking because independent compensation committees grant CEOs more cash-based and less equity-based compensation after SOX. In addition, although SOX improves the audit committee’s oversight functions, our findings support Laux and Laux (2009) that overlapping audit committees have an association with accruals management.

Keywords: corporate governance, independence of boards and committees, overlapping board structure, CEO compensation, discretionary accruals, earnings management