CEO Compensation and Firm Performance in Australia: Pre and Post the Implementation of the “Two-Strike” Rule”

Document Type : Original Article

Authors

1 Accounting Department- Al Kharj, Saudi Arabia Prince Sattam bin Abdulaziz University- College of Business Administration-

2 Department of Accounting- Riyadh, Saudi Arabia Dar Al Uloom University- College of Business Administration-

3 Accounting Department- College of Business Administration- Prince Sattam bin Abdulaziz University- Al Kharj, Saudi Arabia

Abstract

This paper explores the long-term impact of Australia's "two-strikes" rule on the link between CEO pay and firm performance. With a large sample of 9,513 firm-year observations spanning the period 2004-2017, we find that, before the introduction of the rule, CEO pay was positively and significantly associated with firm performance. This pay-performance alignment is broadly seen as a means of encouraging CEOs to take shareholder value to its highest point. Yet our study documents a substantial post-adoption change, with the pay-performance relation falling sharply in intensity. The suggestion is that the "two-strikes" rule, instituted to foster corporate governance by enhancing shareholder power, has had an unintended consequence on CEO pay. Rather than strengthening the link between CEO pay and firm performance, the regulation seems to have resulted in a decrease in CEO pay, possibly because of concern about inducing a "strike" and the possible ousting of board members. The results of this study point to the intricacy of regulatory intervention in corporate governance. Although the purpose of the "two-strikes" rule was to give more power to shareholders and to enhance accountability, evidence indicates that it is a double-edged sword with implications like lower remuneration for CEOs, which may not always be optimal for long-term shareholder wealth maximization. This study contributes to the current debate on the effectiveness and influence of shareholder activism and regulatory reforms to manage executive remuneration, especially in the context of Australia.

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