Board Committee Overlap and the Use of Earnings in CEO Compensation Contracts

Abstract

Using proxy statement data describing the terms of compensation contracts, we examine how overlapping membership between compensation and audit committees influences the use of earnings metrics in compensation. While research predicts that such overlap could either increase or decrease the reliance on earnings, we find that firms with overlapping directors rely less on earnings-based performance measures in incentive contracts without altering the overall level of performance-contingent cash bonuses. In addition, we provide evidence that firms substitute earnings measures with measures less subject to earnings management. Our findings are robust to potential alternative explanations, extend to an implicit relation between earnings and compensation for a larger sample, and are not driven by the tendency towards an overlapping committee structure more broadly.

Keywords: executive compensation, audit committee, compensation committee, board committees, incentive pay, performance measures

JEL Classification: J33, M41, G3