The Characteristic Of Compensation Committee’s Influence On The Use Of Industry Compensation Benchmarking

During the lastfew years the growth of topexecutive pay attractedwidespread publicattention. This led to acloserscrutiny by a wide range of partiesof the mechanism by which thetopexecutive pay was determined. Some study showed the primary compensation principles:benchmarking，when the listed companies widely used industry benchmarking for managersseeking their own interest, the industry benchmarking and the CEO compensation would bespiral escalation and result in the continuing growth of CEO compensation(Bizjak,Lemmom andNaveen,2008),which called the Lake Wobegon Effect（Hayes and Schaefer，2009.All listedcompanies in United State and most in China set up compensation committee to be responsiblefor compensation plan, however, there is no study about how the characteristic of compensationcommittee affect the using of industry compensation benchmarking？So this paper examines whethercompensation committee characteristics affect the use ofindustry benchmarking in Chinese listed companies, from compensation committeeindependence, whether contains CEO of other firms, the size of compensation committee,theaverage age and pay of compensation committee members. The empirical results show that,compensation committee characteristics do have the effect on the use of industry benchmarking,but the effects differ between SOEs and private firms. For SOEs, the more independent directorson compensation committee, especially when consisting solely of independent directors, themore members on compensation committee,the older the members are and more average pay, theless likely to use of industry benchmarking, but when compensation committee contains CEO ofother firms, it’s more likely to use industry benchmarking. Private firms are different in that theindependenceof compensation committee have no effect on the use of industry benchmarking.This paper not only enriches the literature on compensation committee, but also providesempirical evidence for regulators to improve the composition and enhance the effectiveness ofcompensation committee.