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

Author:

Carter Mary Ellen1ORCID,Lynch Luann J.2ORCID,Martin Melissa A.3ORCID

Affiliation:

1. Carroll School of Management, Boston College, Boston, Massachusetts 02467;

2. Darden Graduate School of Business, University of Virginia, Charlottesville, Virginia 22903;

3. College of Business, University of Illinois–Chicago, Chicago, Illinois 60607

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. Although 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 toward an overlapping committee structure more broadly. This paper was accepted by Suraj Srinivasan, accounting.

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

Subject

Management Science and Operations Research,Strategy and Management

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