Restructuring Charges and CEO Cash Compensation: A Reexamination

Abstract

Prior research generally concludes that compensation committees completely shield executive compensation from the effect of restructuring charges on earnings. In contrast, we find that after controlling for the growth in annual inflation-adjusted CEO cash compensation, compensation committees only partially shield CEO compensation from the adverse effect of restructuring charges on earnings, on average. In further analyses, we identify factors associated with cross-sectional differences in the extent of shielding. Specifically, we find that compensation committees appear to: (1) completely shield initial and subsequent restructuring charges for CEOs with long tenure, provided that the firm had not recorded a charge in the two immediately prior years; (2) provide no shielding of subsequent restructuring charges taken by short-tenured CEOs if the firm reported a prior restructuring charge within two years of the current charge; (3) and partially shield the other categories of restructuring charges. Overall, this study provides evidence that compensation committees evaluate the context of each restructuring in determining the extent to which they will intervene to shield executive compensation from the effect of these charges.

Examining the Potential Benefits of Internal Control Monitoring Technology

“…We find that the material weaknesses remediated for the SOX ICM treatment sample is significantly greater than the material weaknesses remediated for the control sample, which is generally consistent with H1. 22 We include Trend in every model to control for overall economic factors (Brazel and Dang 2008;Adut et al 2003). The negative and significant coefficient in Trend implies an increasing (at a decreasing rate) trend in the material weaknesses and Firm Age and Extreme Sales Growth.…”

“…Finally, we include a trend (Trend) variable capturing overall macro-economic effects (e.g., Adut et al 2003;Brazel and Dang 2008). As stated above, with the exception of Trend, the control variables and their expected directional effects are modeled after Doyle et al (2007).…”

The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

“…Adut, Cready, and Lopez (2003) and Comprix and Muller (2006) examine how boards weight restructuring changes and pension expenses, respectively, when determining annual CEO cash compensation (i.e., salary and bonus). Adut et al (2003) find that the extent to which boards shield CEOs from restructuring charges varies as a function of characteristics of the contracting environment (e.g., managerial tenure and the determination of whether restructuring charges are a repeated issue with the manager). Comprix and Muller (2006) find that CEO cash compensation is more sensitive to pension income than to pension expense.…”

The Interrelationships Between Information Technology Expenditures, CEO Compensation and Firm Value

“…The BOD then shields CEOs' cash compensation from the income-decreasing effects of IT spending, given that those investments contribute to firm value (see e.g., Adut et al 2003;Duru et al 2002;Dechow et al 1994). Specifically, the BOD weights IT spending differently for the CEO's current cash compensation as shown in this alternate version of Equation (5):…”

“…Related research shows that investments in IT are significantly riskier than other discretionary strategic expenditures, such as research and development (R&D) (see e.g., Kobelsky et al 2008b;Dewan et al 2007;Benaroch 2002;Clemons and Weber 1990), which could 1 Of course, prior accounting research also establishes the widespread use of net income, or related measures such as earnings per-share or profit margin, is the primary determinant of CEO cash compensation (see e.g., Murphy 1999;Natarajan 1996;Lambert and Larcker 1987;Dechow et al 1994;Ittner et al 1997;Gaver and Gaver 1998;Murphy 1999;Boschen et al 2003;Adut et al 2003;Core et al 2003;Cheng 2004;Cheng and Warfield 2005).…”