Compensation committees, CEO pay and firm performance

We examine whether compensation committee existence (CCX) and compensation committee effectiveness (CCE) are associated with CEO pay-performance alignment, using data drawn from a sample of Australian listed companies. We find that compensation committee existence and effectiveness are positively associated with CEO pay-performance alignment. Further, our results show that the relationships hold for the pre- and post-GFC (Global Financial Crisis) periods but not for the crisis period. This evidence supports the prospect theory argument that in times of macroeconomic crisis, uncontrollable factors external to the firm constitute a firm's reference point for making executive remuneration decisions. These results are robust to alternative measures of firm performance and CEO cash compensation as well as tests of endogeneity. Overall, our evidence suggests that compensation committees contribute to addressing agency problems pertinent to contemporary corporate governance practices.