THE INFLUENCE OF COMPENSATION CONSULTANTS WITH POTENTIAL CONFLICTS INTEREST ON EXECUTIVE COMPENSATION LEVELS

WAHYU AGUNG SUDEWO, Prof. Basu Swastha Dharmmesta, MBA, Ph.D.

2014 | Tesis | S2 Manajemen

-

I investigate whether the compensation consultants with potential conflicts of interest result in higher executive pay levels and lower pay-performance sensitivity for the U.S. publicly large firms on the Russell Top 200 index with a fiscal year for 2012. Critics claim that the compensation consultants are not sufficiently independent because they have a dual role in the same company; and they therefore lead to executive pay levels that are not optimal from the shareholders’ interest. Using all conflict proxies in this study, I find evidence that the consultants with potential conflicts of interest on average impact on the higher executive pay levels across the samples (without an interaction term) and the samples with average ROA (with an interaction term). However, they do not result in the lower pay-performance sensitivity. When the quality of corporate governance is considered, my main findings are that the compensation consultants providing the other services have stronger effects on the executive pay levels and pay-performance sensitivity in the firms with poor corporate governance. Specifically, such potentially conflicted consultants cause the executive compensation levels to be more excessive and less sensitive to the firm performance in the absence of the good corporate governance. This evidence is thereby consistent with the management power theory, and robust to the inclusion of other components of firm size and firm performance. I however find no results that clients of non-Frederic W. Cook and Pearl Meyer earn lucrative executive pay levels and weaker pay-performance sensitivity.

Kata Kunci : executive compensation, compensation consultants, conflicts of interest, payperformance sensitivity, corporate governance