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CEO Stock Options, Future Earnings Performance, and Corporate Governance Quality of Compensation Committees
Jerry Sun,
University of Windsor
ABSTRACT. This paper investigates whether the corporate governance quality of compensation committees is positively associated with the performance consequences of CEO stock option grants. Measuring compensation committee governance quality based on committee characteristics other than committee independence, this study documents strong evidence that future earnings performance is more positively associated with CEO stock option grants for firms with high governance quality of their independent compensation committees, consistent with the notion that incentive alignment (rent extraction) by executive compensation contracts increases (decreases) in compensation committee governance quality. This study also suggests that some compensation committee characteristics reflect the effectiveness of the U.S. listed companies’ independent compensation committees. The results are robust through the various sensitivity tests.
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