How remuneration committees incentivise executive compensation in Australia

Although Australian regulators recommend that remuneration committees (RC) comprise directors who are independent, we argue that independence is not sufficient to avoid agency problems and counter managerial power. We evaluate a range of RC characteristics associated with executive compensation packages. We show that when independent directors, an independent chair or other firms’ CEOs sit on the RC, excess pay is likely to be lower. Furthermore, pay-performance sensitivity is higher when there are more senior directors on the RC. However, when directors are busy or the RC is diverse, executives are more likely to be overpaid. Overpayment and lower pay-performance sensitivity are also associated with the RC being influenced by the CEO, such as when the CEO sits on the RC or has appointed a high proportion of directors. Our results indicate that RC independence alone is insufficient for effective executive remuneration and we recommend appointing senior, experienced and less busy directors to increase RC effectiveness. JEL Classification: G34, G38, J33, J38