Auditor independence, executive pay and firm performance

This paper investigates whether compensation committees actively intervene to adjust accounting performance-based incentive schemes for the real, or perceived, reduced earnings credibility signalled by the purchase of non-audit services. Using a nonlinear, two-stage least-squares method that accounts for the simultaneity of executive pay, firm performance and non-audit fees, we find a significant negative relationship between non-audit fees and the sensitivity of chief executive officer (CEO) pay to firm performance. Point estimates suggest that the reduced weight applied to accounting performance lowers the incentive component of executive pay between roughly 5 and 8 per cent for the CEO of the 'average firm'.