Audit Committee Composition, Compensation Committee Composition, and Compensation Transparency

The increase in executive and director compensation in recent years has resulted in increased scrutiny of corporate compensation practices. Similarly, a recent survey indicates that 75 percent of directors and 75 percent of institutional investors believe that the manner in which executive pay is determined in the US is damaging to the image of corporate America (Perkins 2008). Investors, regulators, and other stakeholders have called on firms to provide greater transparency concerning these practices. My results from a sample of US firms indicate that compensation committee composition plays a greater role in the transparency of compensation practices than does audit committee composition. In addition, the independence of committee members is more important than their financial expertise. Investors, regulators, and other stakeholders outside of the US looking to increase the transparency of corporate compensation practices should look to increase the independence of compensation committees as one possible way to increase the transparency of corporate compensation practices.