Journal of Accounting Review  2023/07
Vol.77   91-137
DOI:10.6552/JOAR.202307_(77).0003

Does the Quality of the Compensation Committee Affect the Relationship Between Core Agency Problems and Pay-performance Sensitivity?

Abstract

This study investigates the association among core agency problems, compensation committee quality, and pay-performance sensitivity. Core agency problems refer to the asymmetry between controlling shareholders’ decision-making rights and the operational risks they need to manage. If controlling shareholders have incentives to pursue their own interests, they may ignore and jeopardize the rights and interests of the minority shareholders (Guo and Wang 2017; Shleifer and Vishny 1997; La Porta et al. 1999; Claessens et al. 2002). Empirical results indicate that in the electronics industry, core agency problems will adversely impact the relationship between the company’s accounting performance and top manager compensation; while in the non-electronics industry, core agency problems positively impact the above-mentioned relationship. In addition, in the electronics industry, the higher the quality of the compensation committee is, the weaker the link between top manager compensation and the company’s accounting performance will be; on the other hand, in the non-electronics industry, the higher the quality of the compensation committee is, the stronger the relationship between top manager compensation and accounting performance will be. Finally, in the electronics industry, the quality of the compensation committee can moderate the relationship between core agency problems and top managers’ pay-performance sensitivity.