IDEAS home Printed from https://ideas.repec.org/a/eee/jocaae/v9y2013i2p237-254.html
   My bibliography  Save this article

Australia’s ‘two-strikes’ rule and the pay-performance link: Are shareholders judicious?

Author

Listed:
  • Monem, Reza
  • Ng, Chew

Abstract

To improve accountability of executive compensation, Australia introduced the ‘say-on-pay’ legislation in 2011, which is widely known as the ‘two-strikes’ rule. We investigate the consequences of this new rule for the pay-performance link in Australian firms. Employing a matched-pair design, we find that pay changes of the chief executive officer and the key management personnel were not significantly positively related to the stock returns of the firms that registered a ‘first strike’ in 2011 under the ‘two-strikes’ rule. However, the relations improved significantly in 2012. Our results also suggest that the shareholders of the ‘first-strike’ firms may have been over-enthusiastic about their voting power in 2011 but exercised this power more judiciously in 2012. Our findings provide important insights for the global debate on governance of executive compensation.

Suggested Citation

  • Monem, Reza & Ng, Chew, 2013. "Australia’s ‘two-strikes’ rule and the pay-performance link: Are shareholders judicious?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(2), pages 237-254.
    • Handle: RePEc:eee:jocaae:v:9:y:2013:i:2:p:237-254
    DOI: 10.1016/j.jcae.2013.10.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1815566913000222
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcae.2013.10.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rachel Merhebi & Kerry Pattenden & Peter L. Swan & Xianming Zhou, 2006. "Australian chief executive officer remuneration: pay and performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 481-497, September.
    2. Xianming Zhou, 2000. "CEO pay, firm size, and corporate performance: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 213-251, February.
    3. Christopher S. Armstrong & Alan D. Jagolinzer & David F. Larcker, 2010. "Chief Executive Officer Equity Incentives and Accounting Irregularities," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 225-271, May.
    4. Scott Schaefer, 1998. "The Dependence Of Pay--Performance Sensitivity On The Size Of The Firm," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 436-443, August.
    5. Fabrizio Ferri & David A. Maber, 2013. "Say on Pay Votes and CEO Compensation: Evidence from the UK," Review of Finance, European Finance Association, vol. 17(2), pages 527-563.
    6. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    7. John E. Core, 2010. "Discussion of Chief Executive Officer Equity Incentives and Accounting Irregularities," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 273-287, May.
    8. HOLMSTROM, Bengt, 1979. "Moral hazard and observability," LIDAM Reprints CORE 379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Linck, James S. & Netter, Jeffry M. & Yang, Tina, 2008. "The determinants of board structure," Journal of Financial Economics, Elsevier, vol. 87(2), pages 308-328, February.
    10. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    11. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    12. Matolcsy, Zoltan & Shan, Yaowen & Seethamraju, Vinay, 2012. "The timing of changes in CEO compensation from cash bonus to equity-based compensation: Determinants and performance consequences," Journal of Contemporary Accounting and Economics, Elsevier, vol. 8(2), pages 78-91.
    13. Clarkson, Peter M. & Walker, Julie & Nicholls, Shannon, 2011. "Disclosure, shareholder oversight and the pay–performance link," Journal of Contemporary Accounting and Economics, Elsevier, vol. 7(2), pages 47-64.
    14. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
    15. John R. Deckop, 1988. "Determinants of Chief Executive Officer Compensation," ILR Review, Cornell University, ILR School, vol. 41(2), pages 215-226, January.
    16. Zoltan Matolcsy & Anna Wright, 2011. "CEO compensation structure and firm performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(3), pages 745-763, September.
    17. Xianming Zhou, 2000. "CEO pay, firm size, and corporate performance: evidence from Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 33(1), pages 213-251, February.
    18. Philip Brown & Wendy Beekes & Peter Verhoeven, 2011. "Corporate governance, accounting and finance: A review," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(1), pages 96-172, March.
    19. Productivity Commission, 2009. "Executive Remuneration in Australia," Inquiry Reports, Productivity Commission, Government of Australia, number 49.
    20. Chalmers, Keryn & Koh, Ping-Sheng & Stapledon, Geof, 2006. "The determinants of CEO compensation: Rent extraction or labour demand?," The British Accounting Review, Elsevier, vol. 38(3), pages 259-275.
    21. Monem, Reza M., 2013. "Determinants of board structure: Evidence from Australia," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(1), pages 33-49.
    22. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cullinan, Charles P. & Mahoney, Lois & Roush, Pamela B., 2017. "Are CSR activities associated with shareholder voting in director elections and say-on-pay votes?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(3), pages 225-243.
    2. Ernest Gyapong & Ammad Ahmed & Collins G Ntim & Muhammad Nadeem, 2021. "Board gender diversity and dividend policy in Australian listed firms: the effect of ownership concentration," Asia Pacific Journal of Management, Springer, vol. 38(2), pages 603-643, June.
    3. Pamela Kent & Kim Kercher & James Routledge, 2018. "Remuneration committees, shareholder dissent on CEO pay and the CEO pay–performance link," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 445-475, June.
    4. Ferri, Fabrizio & Göx, Robert, 2018. "Executive Compensation, Corporate Governance, and Say on Pay," Foundations and Trends(R) in Accounting, now publishers, vol. 12(1), pages 1-103, April.
    5. Beaumont, Stacey & Clarkson, Peter & Tutticci, Irene, 2018. "Identifying lobbying strategies: An analysis of public responses to the Productivity Commission Inquiry into executive remuneration in Australia," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 288-306.
    6. Kanapathippillai, Sutharson & Gul, Ferdinand & Mihret, Dessalegn & Muttakin, Mohammad Badrul, 2019. "Compensation committees, CEO pay and firm performance," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Clarkson, Peter M. & Walker, Julie & Nicholls, Shannon, 2011. "Disclosure, shareholder oversight and the pay–performance link," Journal of Contemporary Accounting and Economics, Elsevier, vol. 7(2), pages 47-64.
    2. Thi Bui & Andrew Ferguson & Peter Lam, 2021. "CEO compensation in early‐stage firms: Rewards for prospectivity and survival," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 895-928, May.
    3. Yaowen Shan & Terry Walter, 2016. "Towards a Set of Design Principles for Executive Compensation Contracts," Abacus, Accounting Foundation, University of Sydney, vol. 52(4), pages 619-684, December.
    4. Hideaki Sakawa & Naoki Watanabel, 2008. "Relationship between Managerial Compensation and Business Performance in Japan: New Evidence Using Micro Data," Asian Economic Journal, East Asian Economic Association, vol. 22(4), pages 431-455, December.
    5. Pamela Kent & Kim Kercher & James Routledge, 2018. "Remuneration committees, shareholder dissent on CEO pay and the CEO pay–performance link," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 445-475, June.
    6. James Borthwick & Aelee Jun & Shiguang Ma, 2020. "Changing board behaviour: The role of the ‘Two Strikes’ rule in improving the efficacy of Australian Say‐on‐Pay," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 827-876, April.
    7. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    8. Martin Bugeja & Stephanie Fohn & Zoltan Matolcsy & Neil Fargher, 2016. "Determinants of the levels and changes in non-executive director compensation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 627-667, September.
    9. Stacey Beaumont & Raluca Ratiu & David Reeb & Glenn Boyle & Philip Brown & Alexander Szimayer & Raymond Silva Rosa & David Hillier & Patrick McColgan & Athanasios Tsekeris & Bryan Howieson & Zoltan Ma, 2016. "Comments on Shan and Walter: ‘Towards a Set of Design Principles for Executive Compensation Contracts’," Abacus, Accounting Foundation, University of Sydney, vol. 52(4), pages 685-771, December.
    10. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    11. Justin Law & Wayne Yu, 2018. "Corporate spinoffs and executive compensation," Frontiers of Business Research in China, Springer, vol. 12(1), pages 1-25, December.
    12. Brown, Paul J & Matolcsy, Zoltan & Wells, Peter, 2014. "Group versus individual compensation schemes for senior executives and firm performance: Some evidence based on archival data," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(2), pages 100-114.
    13. Kato, Takao & Long, Cheryl, 2006. "Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges," Economic Development and Cultural Change, University of Chicago Press, vol. 54(4), pages 945-983, July.
    14. Xin Qu & Daifei Yao & Majella Percy, 2020. "How the Design of CEO Equity-Based Compensation can Lead to Lower Audit Fees: Evidence from Australia," Journal of Business Ethics, Springer, vol. 163(2), pages 281-308, May.
    15. Katarzyna Cieślak, 2018. "Agency conflicts, executive compensation regulations and CEO pay-performance sensitivity: evidence from Sweden," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(3), pages 535-563, September.
    16. Kanapathippillai, Sutharson & Gul, Ferdinand & Mihret, Dessalegn & Muttakin, Mohammad Badrul, 2019. "Compensation committees, CEO pay and firm performance," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    17. Sun, Jerry & Cahan, Steven F. & Emanuel, David, 2009. "Compensation committee governance quality, chief executive officer stock option grants, and future firm performance," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1507-1519, August.
    18. Jean-Christophe Duhamel & Réda Sefsaf, 2017. "Valeur de la gouvernance d'entreprise et gouvernance des valeurs de l'entreprise. Recherche sur les effets des codes de gouvernance et les stratégies de communication en matière de gouvernance," Working Papers halshs-01633982, HAL.
    19. Adi Masli & Matthew G. Sherwood & Rajendra P. Srivastava, 2018. "Attributes and Structure of an Effective Board of Directors: A Theoretical Investigation," Abacus, Accounting Foundation, University of Sydney, vol. 54(4), pages 485-523, December.
    20. Ricardo Correa & Ugur Lel, 2013. "Say on pay laws, executive compensation, CEO pay slice, and firm value around the world," International Finance Discussion Papers 1084, Board of Governors of the Federal Reserve System (U.S.).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jocaae:v:9:y:2013:i:2:p:237-254. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-contemporary-accounting-and-economics .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.