KSU study offers rare peek into inner workings of corporate committees that set CEO pay

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New study offers rare peek into inner workings of compensation committees Kennesaw State…

Georgia (Sep 14, 2012)New study offers rare peek into inner workings of compensation committees

Kennesaw State researchers conduct first U.S. study on corporate boards’ executive compensation committee processes

KENNESAW, GA. (Sept. 14, 2012) ­­–– Despite public outrage over excessive executive compensation, corporate boards are genuinely torn between rewarding CEOs for good performance and protecting shareholder returns, according to a new Kennesaw State University study that is the first in the U.S. to look at compensation committees’ processes using in-depth interviews of committee members.

The article, published in the fall 2012 issue of the prestigious academic journal Contemporary Accounting Research, is based on interviews with compensation committee members –– mostly chairs ­­­­–– from 20 publicly traded companies.

The study’s four authors are faculty members at Kennesaw State’s Michael J. Coles College of Business: Dana Hermanson, professor of accounting; James Tompkins, professor of finance; Rajaram Veliyath, professor of management; and Zhongxia Ye, associate professor of accounting. Hermanson is director of research at Kennesaw States Corporate Governance Center; Tompkins is director of board advisory services.

“Compensation committee members said they feel a lot of tension between retaining management and keeping shareholders happy,” says Hermanson, who years ago co-authored a similar study on audit committees. “Committee members talked a lot about balance and fairness. They feel a lot of pressure to keep great people to run their companies, but they are also sensitive to shareholders’ concerns not to pay them excessively.”

And while overpaying corporate executives can cut into profits and shareholder returns, there is also a risk of paying them too little. “Underpaying can be at the expense of the shareholders,” says Tompkins, explaining that having the right person at the helm is important to a firm’s value. “While much of the media focus is on excessive CEO compensation, the risk of underpaying can potentially be greater than the risk of overpaying.”

Corporate boards of directors tend to have three major committees: audit, nominating and compensation. And while audit committees faced scrutiny in the early 2000s as Sarbanes-Oxley and other regulations were put in place, in recent years compensation committee members have faced intense public and regulatory scrutiny as executive compensation seems to spiral out of control.

Past studies had looked at compensation committees’ characteristics and executive compensation outcomes, but to date no study has provided a comprehensive portrait of the compensation committee process in U.S. public companies. One of the problems is that it is difficult to gain access to corporate directors.

“Most studies have looked at the output of compensation committees, but the processes engaged in by the committees have always been a black box,” says Veliyath. “We opened up the black box.”

The researchers identified public company compensation committee members from across the U.S., with the assistance of a large compensation consulting firm or through their professional contacts. Most of the members interviewed were committee chairs, and they were mostly from health care, financial services and technology companies with mean revenues of nearly $3 billion. The members were interviewed in 2009 face-to-face or via conference call for an average of two hours. The study illustrates how the committees go about making decisions related to CEO and executive compensation, CEO evaluation, director compensation, hiring of consultants and meetings and interactions, among other considerations.

Kennesaw State researchers were pleased to find out that there is a genuine desire on the part of compensation committee members to be balanced and fair. “There was a genuine effort on behalf of the directors to get it right,” says Tompkins.

Veliyath says that most committee members are very conscientious and conduct their activities with due diligence. “That is contrary to the perception often portrayed in the media,” he explains.

To view the study, please go to http://onlinelibrary.wiley.com/doi/10.1111/care.2012.29.issue-3/issuetoc

 

--- Aixa M. Pascual

 

 

 

 

 




A leader in innovative teaching and learning, Kennesaw State University offers more than 150 undergraduate, graduate and doctoral degrees to its approximately 38,000 students. With 13 colleges on two metro Atlanta campuses, Kennesaw State is a member of the University System of Georgia and the third-largest university in the state. The university’s vibrant campus culture, diverse population, strong global ties and entrepreneurial spirit draw students from throughout the region and from 92 countries across the globe. Kennesaw State is a Carnegie-designated doctoral research institution (R2), placing it among an elite group of only 6 percent of U.S. colleges and universities with an R1 or R2 status, and one of the 50 largest public institutions in the country. For more information, visit kennesaw.edu.

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