Height Of Ceo Remuneration

Published Date: 02 Nov 2017

Tom Stofmeel

Schoolstraat 31C

9712 JR Groningen

[email protected]

Student number: s1859099

Phone number: 06-12133917

Supervisor:

dr. E.P. Jansen

March 2013

University of Groningen

Faculty of Economics and Business

MSc Accountancy

Content:

Introduction:

The remuneration of CEO’s has been a topic of concern for many over the last few years, the society views CEO remuneration often as extravagant, this outside pressure has as a consequence that managers can be forced to pay back or decline (part of) their bonuses. Even SNS-bankers who have received their bonuses in the period 2006-2008 are pressured by the Dutch Minister of Finance to return their bonuses 5 years later (Elsevier, 5-2-2013) [1] . The Royal Bank of Scotland (RBS) announced that it intends to claw back bonuses totaling $471 million (New York Times, 6-2-2013) [2] , these are just two examples of the current problems the remuneration market is facing.

As a result of the social concern and pressure it seems illogical that CEO’s can still receive such extravagant remuneration. How come managers still receive excessive remuneration? One answer may lie in the power managers have over their own compensation, according to the Managerial power theory, CEO’s have a large amount of power which they can use in order to influence their own compensation (Otten & Heugens, 2008). Furthermore the agency theory can be used for the explanation of this problem: According to the agency theory the board of directors (BoD) is in place to decrease the information asymmetry that exists between a manager (agent) and the shareholder (principal) (Conyon & Peck, 1998) the BoD’s goal is to make sure that management compensation is linked to management effort and skills, a remuneration committee is in place to draft performance contracts that meet these requirements. The remuneration can be obfuscated in remuneration reports, when information about remuneration can be negative for the CEO, the CEO will be more likely to try and obfuscate this information, as the management obfuscation hypothesis implies (Bloomfield, 2002). The manager has incentives to do so because obfuscated information will result in less public pressure, resulting in a higher probability of keeping the received bonus.

In this paper the relationship between four firm variables (Firm size, Firm performance, Board- and remuneration committee independence) and the height of the CEO remuneration is being researched. Along with the effects of the variables on the relationship between the height of the CEO remuneration and the readability of the remuneration report. This is to answer the question: "In what way is the readability of the remuneration report affected and how these relations can be explained?"

This paper is important for a number of reasons. First, in the papers of Mehran, 1995; Aggarwal & Samwick, 1999 and Lee, 2009 the agency theory is seen as the leading problem in the conflict of interest that exists between managers and shareholders. A solution for this problem would be to adjust the remuneration of the CEO to match the company performance (Nyberg et al., 2010). By researching the relationship between firm performance and remuneration this paper will therefore contribute to solving agency problems.

Second, the relation between BoD independence and the CEO remuneration has been researched regularly (Finkelstein & Hambrick, 1989; Larcker & Weichelt, 1993; Boyd, 1994 and Zajac, 1995), however the findings in these papers were ambiguous. Tosi et al. (2000) indicate that further research into the effect of corporate governance on CEO remuneration is needed and recommend research in this field. Van Essen et al. (2011) performed a meta-analysis in which the determinants of CEO remuneration were studied. The literature is conflicting in which variables are determinants of the relationship and how strong the relation is. Therefore the relation between board independence and the height of CEO remuneration will be studied.

Thirdly, as Tosi et al. (2000) points out further research into the effects of corporate governance on the remuneration is needed. In the research of Van Essen et al. (2011) the independence of the remuneration committee is mentioned as one of the indicators of the quality of corporate governance, therefore the implementation of the independence of the remuneration committee in this research will shed more light on the effects of corporate governance on the remuneration. Furthermore, research of Conyon, Core and Guay (2011) and Gregory-Smith (2011) show no relation between the independence of the remuneration committee and executive pay, however managerial power theory would suggest otherwise, this article will thus contribute to the question on which matters academics and policy makers should focus their attention in the pay-setting process (Gregory-Smith, 2011).

Fourth, a meta-analyses on CEO remuneration is done by Tosi et al. (2000), they emphasized on the relation between the size of the organization and firm performance on the remuneration. As Tosi et al. (2000) show that the size of the organization is one of the leading explanatory variables in the differences in CEO pay. Therefore this will also help explaining the relation studied in this paper.

Fifth, furthermore this research will study the relation between the height of the CEO remuneration and the remuneration report readability and the effects of the before mentioned variables (firm performance, firm size, BoD independence and the size of the remuneration committee) on this relation. Even though many researched the behavior of security analyst on the financial document readability (Barth et al. 2001, Botosan & Harris, 2000, Healy et al. 1999, and Lang & Lundholm 1996), or the behavior of investors (Francis, LaFond, Olsson, & Schipper, 2007, Jiang, Lee, & Zhang, 2005 and You & Zhang, 2009), in all these studies the Fog index was used for measuring the readability of financial documents which is not a good technique to measure financial document readability according to Lougran and McDonald (2013). They state that when using the Fog Index, words as ‘business’, ‘company’ and ‘dividend’ are seen as difficult to read. These words however are well-known by most stakeholders thus not effecting document readability. Lougran and McDonald (2013) suggest that in order to measure readability more precise the length of the document can be used. As documents become lengthier, they can be used to disguise relevant information in a web of words. This research will build on the research of Laksmana, Tietz & Yang (2012), they researched the relation between readability of the remuneration report and the CEO remuneration. This paper will use the length of the remuneration report instead of the Fog score, to see if the same results can be found.

Sixth, although management obfuscation has been the topic of many papers (e.g. Linsley and Lawrence, 2007; Nelson and Pritchard, 2007; Li, 2008), these papers focused on the readability of the annual report. However the obfuscation in the remuneration report on its own has not been researched regularly. Only Laksmana et al. (2012) researched the readability of the remuneration report. Yet research in this field is important for both shareholders and investors. When it becomes clearer why managers obfuscate information it will be easier to respond to it. This paper is different from that of Laksmana et al. (2012) because in this research the effect of the four variables (firm performance, firm size, BoD independence and the size of the remuneration committee) on the CEO remuneration is measured, thereafter the moderating effect of these variables on the relationship between CEO remuneration and the readability of the remuneration report is examined to get a clearer view of what actually affects the readability of the remuneration report.

Finally, this research topic is still very important for the society, the societal pressure and distress over manager rewards is a topic of great concern for both managers and regulators. The society demands rewards that they see fit for the company performance however a manger will try to maximize its payment. Research in this topic can contribute to reducing this conflict by creating a clearer view on how a remuneration report needs to be interpreted by the stakeholders.

In conclusion this paper is important because; it will contribute to solving agency problems, will explain the relation between the four variables (firm performance, firm size, BoD independence and the size of the remuneration committee) and CEO remuneration, shed light on financial document readability by using length as the measure, research the readability of the remuneration report using moderating variables and help to reduce the conflict between managers and the society.

The remainder of the paper proceeds as follows. In section 2 the relevant theory and literature will be discussed and the studies hypotheses will be developed. The research design will be discussed in section 3 where after in section 4 the results will be addressed. Section 5 will conclude and discus the papers limitations.

Theory:

This paper will use three theories on which the studies will be based: These theories are; Managerial power theory, the agency theory and the management obfuscation theory. These theories will be discussed before the hypotheses will be established using both expectations based on literature as well as theory.

Managerial power theory.

The managerial power theory argues that unresolved issues within the pay setting process, lead up to the incentive compensation of the CEO. The CEO has enough power and influence over the other directors sitting in the board that the pay setting process can be dominated. CEO’s are thus being accused of elevating their own pay level by influencing the board. According to Cosh (1975) the CEO can have the firm grow beyond its optimal size in order to gain benefits which are associated with larger firms. Because the pay-size relationship explains that CEO’s of larger companies receive larger remuneration. But, the managerial power theory even illustrates that actions of the CEO are used to influence the board, which empowers the CEO to successfully decide upon his/her own remuneration.

The CEO can govern the pay setting process. Otten & Heugens (2008) have found four factors making directors side with the management. First, most CEO’s have power over board nominations by which the CEO can remove and appoint individuals that will support his future pay plans. In this way board member’s jobs depend on the approval of the CEO, thus making it more likely to keep the CEO interests in mind while they should be protecting shareholder interest (Bebchuk & Fried,

2006). Secondly, the director may hope that his own pay will benefit if a more generous attitude is adopted (Brick, Palmon, & Wald, 2006). Third, the director will not oversee the consequence of rewarding a high pay; both economic (Bebchuk & Fried, 2004) and reputational (Bebchuk & Fried 2003). Fourth, the generosity may come forth out of friendship between the CEO and board members (Main, O’Reilly, & Wade, 1995). The CEO’s control over their own compensation can best be seen in the outcome of CEO pay negotiations. (Bebchuck et al. 2002) Bebchuck et al. (2002) feels that ineffective compensation arrangements are commonplace. Which will only be regulated until shareholders, society or business pressure the CEO into moderation of the remuneration.

Up until the managerial power theory was presented traditional theorists were of the opinion that the pay setting process was an independent process on which the CEO had no influence. The optimal contracting models see CEO remuneration as the optimal result of pay negotiations. This results in performance contracts where the CEO is triggered to maximize his own compensation through company performance. Core, Guay and Thomas (2004) argue that managerial power will decline under specifically designed performance contracts. This is enabled by tying rewards to company performance and stocks. According to Holmstrom (2006) mangers do not have the power to fully decide upon their pay, because the society demands that the pay levels are consistent with the market average. Otten & Heugens (2008) researched whether firm-level governance principles could effectively affect the discretion power of the CEO. They found that different countries could benefit from different governance principles; therefore copying effective jurisdictions from other countries would not have the desired effect. We seek to relate the effects studied to the theories in order to explain why the relations are found.

Agency theory.

To get an overview of the problems and costs due to agency problems, the agency theory will be discussed in the next section. The article of Jensen en Meckling (1976) will be used to discuss the agency theory.

An agency relation is described as: "a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent" (Jensen en Meckling, 1976). A conflict of interest can occur when both parties will try to maximize their own utility. When this is the case, the agent will not take the actions that are expected from the viewpoint of the principal. The principal will try to reduce these conflicts by offering the agent incentives to act concurringly the principal’s view. The actions of the manager need to be monitored in order to see if he acts according to plan. These actions cost effort and money for the principal, who incurs both the monitoring costs as the bonding expenditures (Jensen en Meckling, 1976).

According to Tosi et al. (2000) shareholders face at least three problems in reducing agency costs: First, it is very hard for the principal to effectively monitor the agent’s actions. The agent has non-programmable tasks which makes effective performance measurement more difficult to realize. Second, the shareholders have less knowledge of the business processes the agent has to deal with. This information asymmetry will make it extremely difficult for the principal to decide whether the action taken by the agent serves his interests. Third, an agent can use the company resources to pursue income maximization while the company performance will not benefit likewise. This is mostly due to mistakes in the CEO’s compensation contract. The challenge from the agency perspective is how to make sure the agent will work to maximize the principal’s utility while pursuing their own interest and minimizing their own risks (Bloom & Milkovich, 1998).

The principal will want to obtain this situation through effective contracting. In which the performance of the agent is measured using clear and understandable performance measures which make sure the manager will pursue the interests of the principal. Furthermore incentives are used in order to make it rewarding for the agent to comply with the outcomes that are seen as profitable for the principal (Tosi et al. 2000).

Such a performance contract can be accomplished by allocating the monitoring task to the BoD. In general the BoD includes "inside" managers (who are in employed by the firm) and "outside" managers (who are not in fulltime employment by the firm). In this way the BoD can be seen as the ultimate internal monitor for the contracts with shareholders (Fama, 1980). When the executing tasks (inside managers) and the control tasks (outside managers) are separated, the monitoring will be more complete (Fama & Jensen, 1983).

According to Jensen and Murphy (1990) the agency theory predicts: "that an optimal contract will tie the agent’s expected utility to the principal’s wealth; therefore agency theory predicts that CEO compensation policies will depend on changes in shareholder wealth." The task of the BoD is to monitor this relation.

Management obfuscation theory.

According to Courtois (2004) obfuscation is a specific issue of presentation and obfuscation is explained as: "The word obfuscation is used to describe a narrative writing technique that obscures the intended message, or confuses, distracts or perplexes readers, leaving them bewildered or muddled." According to Courtois (2004) there are many ways in which obfuscation can take place: "Such obfuscation can arise through the use of esoteric or obscurantist vocabulary and/or gobbledygook, extraneous and non-relevant information, long sentences with complex grammatical structures and/or high variability in reading ease, and convoluted and/or spurious argumentation."

Management obfuscation theory suggests that managers are not neutral in presenting narratives (Sydserff and Weetman, 1999). In the case of the remuneration reports managers can have incentives to obfuscate the report, especially managers who are not paid according to the company performance (Laksmana et al. 2012). The impressions of shareholders can be managed by using obfuscation in financial documents (Courtis, 2002), or to deliberately include nonsense or false information in the texts (Courtois, 2004). There are two ways in which management obfuscation can take place (Courtois, 2004): First, there is the deliberate intent to obfuscate. In this case the goal of the obfuscation is to deliberately manipulate readers of the document. Obfuscation can be used to ease the information impact of bad firm performances or overpaid CEO’s in order to calm down the stakeholders. In this way management may try to conceal or weaken the effect of damaging information on the reader. Second, the document may be unwillingly obfuscated because too many people are involved in the writing process. Different people write different parts of the document. The obfuscation can exist through the imbalance in style, imbalance in writing ability or the lack of coordination in the documents content. According to (Courtois, 2004) both forms of obfuscation (deliberate and unwilling obfuscation) can be present in one financial documents. That makes it even harder for stakeholders to obtain the actual value of the information.

CEO remuneration that is not in line with company performance will more likely be obfuscated by the management in order to make it less visible to stakeholders that the compensation is not linked to actual company performance. In this way CEO’s can exploit the information asymmetries that they have over the stakeholder (see agency theory) (Laksmana et al, 2012). The contract of the CEO will most likely contain share options which make the incentive for obfuscation even higher. Shareholders could respond to "bad" news by selling stocks, directly decreasing the value of the CEO compensation (Bloomfield, 2002).

Li (2008) has researched this by using the ‘incomplete revelation hypothesis’. Information that is harder to process will be processed less complete in the security markets (Bloomfield, 2002). In this way managers are able to strategically obfuscate information by providing this information in a less transparent document. This information will thus be processed less complete in the security market leading to a higher remuneration for the CEO (Bloomfield, 2002).

Hypotheses

In this section the research hypotheses are discussed. To substantiate the hypotheses the relevant literature will be reviewed and the relevant theories will be discussed.

The relation between organizational size and the height of CEO remuneration.

The first relationship researched in this study is the relationship between organizational size and remuneration. Much research has been conducted studying the effect of organizational size on CEO remuneration. Almost all studies concluded that when the firm is larger the CEO remuneration will be larger, this to link CEO incentives to shareholder wealth. Shareholder wealth will be bigger and have larger profit possibilities when a firm grows bigger, therefore the incentives will be larger.

However the researches do not find identical results when looking at the correlations of the relation. In the meta-analysis of Tosi et al. (2000) different results were found. The studies from Belkaoui & Picur (1993), Gray & Cannella (1997) and David, Kochhar & Levitas (1998) correlations between 0.107 and 0.170 were reported. While studies by Boyd (1994), Sanders & Carpenter (1998) and Finkelstein & Boyd (1998) found that firm size and the height of CEO remuneration correlated between .42 and .62. Tosi et al. (2000) concluded that firm size accounted for more than 40% of the variance in CEO pay levels.

Using both the agency theory and the managerial power theory the same conclusion can be drawn. The larger a company is the more likely that a manager will have a large network. The larger the network the larger the influence of the manager will be, leading towards a higher remuneration. According to the agency theory the agents expected utility must be tied to the principals wealth. In larger companies shareholder wealth will be larger leading to a higher remuneration.

To conclude based on the findings by Tosi et al. (2000) and other studies, there exists a positive relation between firm size and CEO compensation. Moreover based on the managerial power theory and the agency theory the same positive relation can be expected. In line with these findings I hypothesize:

H1: Firm size and the height of CEO remuneration are positively related.

The relation between firm performance and the height of CEO remuneration.

The relationship between Firm performance and the height of CEO remuneration has been researched regularly. There are three mayor meta-analytic reviews about this topic (Tosi et al., 2000, Dalton et al. 2003 and Nyberg et al. 2010).

Tosi et al. (2000) found different relationships within their research, there were some negative relationships some mild positive and some strong positive relations. In the end they found a mild relationship between firm performance and CEO remuneration. This in contrast to what could be expected using the agency theory.

Furthermore Dalton et al. (2003) has reported weak alignment relationships between firm performance and the height of CEO remuneration. They strengthened the conclusion that financial alignment does not exist and that the agency theory is not true for the executive pay relation.

However the research of Nyberg at al. (2010) shed another light on this relation by developing a finer grained perspective on CEO financial alignment. They stated that financial alignment is the alignment between CEO return and shareholder return. Nyberg et al. (2010) found a strong relation between CEO return and shareholder return which is different than the view of Tosi et al. (2000) and Dalton et al. (2003) that there is little financial alignment in the interests of shareholders and CEO’s.

Using the Managerial power theory, the CEO that is responsible for good company performances is in a secure position. Therefore this CEO will be more likely to have more influence in the company. According to the managerial power theory this will lead to a higher CEO remuneration.

To conclude based on the findings by Tosi et al. (2000), Dalton et al. (2003) and Nyberg et al. (2010), there are mixed relations found in the literature. Based on the managerial power theory a positive relation can be expected. There are different opinions about whether or not the agency theory will be applicable on this relation. However based on the latest research from Nyberg et al. (2010) and the managerial power theory I will hypothesize:

H2: Firm performance and the height of CEO remuneration are positively related.

The relation between BoD independence and the height of CEO remuneration.

Research in the field of board characteristics and the effect on CEO remuneration has been performed before. In their paper Tuggle et al. (2010) show that any restriction in the monitoring function of the BoD can influence the degree in which their task can be executed. When a CEO has a place in the BoD (CEO duality) information towards the BoD can be transferred selectively. This restricts the monitoring function. Tuggle et al. (2010) also concluded that when the period’s company performance increased BoD monitoring decreased and vice versa. Conyon & Peck (1998) and van Essen et al. (2012) also studied the effect of CEO duality on CEO remuneration. This paper will however look at the independence of the BoD, another board characteristic.

From the viewpoint of the managerial power theory, Bebchuck & Fried (2006) claim that when CEO’s have more power over the BoD they are in a better position to negotiate and influence their pay. The CEO will have more power over the BoD when the board is more dependent (e.g. more inside directors). A position in the BoD is linked to status and a good salary. Most directors will like to keep their position in the board and be asked to hold positions in different boards. They know the CEO plays a big role in assigning board members so they are likely to agree with the CEO’s propositions (Bebchuk & Fried, 2006).

From the viewpoint of the agency theory, the BoD is in place to align shareholder and CEO interest. When the BoD is more linked to the CEO, more dependent of the CEO, they are more likely to lose track of the shareholders perspective. In order to make sure that the BoD keep working for shareholder interest it is important that the board is independent. Based on the agency theory are more independent board will lead to a lower CEO remuneration.

To conclude, I feel that based on the findings by Tuggle et al. (2010), Conyon & Peck (1998) and van Essen et al. (2012) the same relationship can be expected for BoD independence and CEO remuneration. Moreover based on the managerial power theory and the agency theory the same negative relation can be expected. In line with these findings I hypothesize:

H3: BoD independence and the height of CEO remuneration are negatively related.

The relation between remuneration committee independence and the height of CEO remuneration.

In the most important researches that have been done on the relation between the independence of the remuneration committee and the CEO remuneration, the study of Conyon, Core and Guay (2011) and the study of Gregory-Smith (2011) no relationship was found between the independence of the remuneration committee and the CEO remuneration.

However the from the viewpoint of the managerial power theory the CEO which has more power over the remuneration committee they are in a better position to negotiate and influence their pay. The CEO will have less power over the remuneration committee when the committee consists out of independent (outside) directors. For that reason a negative relation between CEO remuneration and the independence of the remuneration committee is expected.

Furthermore from the viewpoint of the agency theory the remuneration committee is in place to make sure that the performance contract aligns the interest of the CEO and the shareholders. When the remuneration committee is dependent on the CEO it is more likely to agree to the CEO’s compensation plans. Based on the agency theory are more independent committee will lead to a lower CEO remuneration.

To conclude, based on the study of Conyon, Core and Guay (2011) and the study of Gregory-Smith (2011) no relationship can be expected for remuneration committee independence and CEO remuneration. However based on the managerial power theory and the agency theory a negative relation can be expected. In line with these findings I hypothesize:

H4: Remuneration committee independence and the height of CEO remuneration are negatively related.

The relation between the height of CEO remuneration and the readability of the remuneration report.

Research about the readability of specifically the remuneration report has to the best of my knowledge only been done by Laksmana et al. (2012) however they research whether managers would try to obfuscate information in the remuneration report for the part of their pay which was not linked to the economic determinants of pay. When the pay was not linked to the economic determinants of pay Laksmana et al. (2012) found that managers tried to obfuscate information by making documents more difficult to read. Based on these findings the literature suggests a negative relation between CEO remuneration and the readability of the remuneration report.

The agency theory can help to research this relation: according to the agency theory agency problems occur through the misalignment between the principal’s and shareholders interest. The CEO wants his own utility to be optimized while the shareholder does not want the CEO to receive an excessive pay. According to Lee (2008) information that is harder to process will be processed less complete by the shareholders. This gives the management incentive to obfuscate information in order to decrease the reaction towards a misalignment in interests.

Furthermore the management obfuscation theory can be used to explain this relation. CEO remuneration that is not in line with company performance will more likely be obfuscated by the management in order to make it less visible to stakeholders that the compensation is not linked to actual company performance (Laksmana et al. 2012). Core, Guay & Larker (2008) found that more media attention was given to CEO’s who received higher CEO remuneration. When the (negative) media attention is higher the CEO will have a higher need to impress and will be more likely to obfuscate information.

To conclude, based on the study of Laksmana et al. (2012) a negative relation between CEO remuneration and the readability of the remuneration report can be expected. Moreover based on the managerial power theory and the agency theory a similar relation can be expected. In line with these findings I hypothesize:

H5: The height of CEO remuneration and the readability of the Remuneration report are negatively related.

The following four hypotheses are all giving information on their moderating effect on the relation between the height of remuneration and the readability of the remuneration report. Most of these relation (all but the moderation effect of firm performance) have not been researched before. Therefore these hypotheses will for the biggest part be based on theoretical expectations.

The moderating effect of organizational size

The first is the moderating effect of organizational size. According to the size–pay relationship, which explains that CEO remuneration increases when firm size increases, the CEO remuneration will be related to organizational size. Shareholder will expect that CEO of large companies will receive larger remuneration. Therefore the manager will have less incentives to obfuscate information based solely on the height of the remuneration. The negative effect on the readability discussed in hypothesis 5 will be weakened by the increase in organizational size. The interests of the shareholders (principal) and the CEO (agent) will therefore be more aligned when managers of large organizations receive a high remuneration.

To conclude, based on both the agency theory and the management obfuscation theory the manager will have less incentives to obfuscate information about their remuneration when the organizational size increases. In line with these findings I hypothesize:

H6: Organizational size weakens the strength of the relationship between the height of CEO remuneration and the readability of the Remuneration report.

The moderating effect of firm performance

For the moderating effect of firm performance on the relationship between the height of CEO remuneration and the readability of the Remuneration report, the following relation can be found. Laksmana et al. (2012) already studied this relation the found that the obfuscation increased when the remuneration received by the CEO did not align with the firm performance. The readability of the remuneration report decreased when the remuneration was not linked to the economic determinants of pay. According to Laksmana et al. (2012) a lower firm performance would increase management incentives for obfuscation.

According to the agency theory problems arise when the interest of the shareholders and the CEO are not aligned. When firm performance is low and the remuneration of the CEO is high misalignment in interest exists. This because the CEO can have his remuneration while he does not have the firm performance that is expected. In that case an agency problem exists.

Furthermore, according the management obfuscation theory a manager is more likely to obfuscate information if this information will be bad for his own remuneration (Bloomfield, 2002). In this case shareholders will not like information about high remuneration on the same time as bad company results and the manager will be more likely to obfuscate information in the remuneration report. Consequentially, the higher the firm performance is the weaker the relation between remuneration and the readability of the remuneration report will be.

To conclude, based on Laksmana et al. (2012) and both the agency theory and the management obfuscation theory the manager will have less incentives to obfuscate information about their remuneration when the firm performance increases. In line with these findings I hypothesize:

H7: Firm performance weakens the strength of the relationship between the height of CEO remuneration and the readability of the Remuneration report.

The moderating effect of BoD independence.

The third moderating effect is that of BoD independence. Based on earlier argumentation it can be expected that a more independent board will make sure there is more alignment between the wishes of the shareholder and the manager. This will decrease the change of agency problems as they are the result of misalignment between shareholders and managers. When the interests of both shareholders and the CEO are aligned the incentive for the CEO to obfuscate information will be lower. The management obfuscation hypothesis is used to argue that obfuscation is used to reduce the effect of bad news on the company’s securities. No negative effect is expected when there are no agency problems thus management obfuscation will be less likely when the board is more independent.

To conclude, based on both the agency theory and the management obfuscation theory the manager will have less incentives to obfuscate information about their remuneration when the BoD are more independent. In line with these findings I hypothesize:

H8: BoD independence weakens the strength of the relationship between the height of CEO remuneration and the readability of the Remuneration report.

The moderating effect of the remuneration committee independence.

The argumentation for the last hypothesis we will rely mostly on the use of the managerial power theory. The remuneration committee is responsible for writing the remuneration report. The remuneration committee have less incentives to obfuscate information in the remuneration report. However it is in the CEO’s interest if high remuneration is obfuscated in the remuneration report. The higher the power is the CEO has over the remuneration committee the sooner they will be inclined to obfuscate the information according to the wishes of the CEO. The more independent the committee members are the less likely they are to be pressured and pushed around by the CEO. Therefore a more independent remuneration committee will increase the readability of the remuneration report.

To conclude, based on both the managerial power theory and the management obfuscation theory there will be less incentives to obfuscate information about their remuneration when the remuneration committee is more independent. In line with these findings I hypothesize:

H9: Remuneration committee independence weakens the strength of the relationship between the height of CEO remuneration and the readability of the Remuneration report.

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