Compensation Committee Expertise and Relative Performance Evaluation of Executive Compensation

This study examines whether the use of relative performance evaluation (RPE) in executive compensation depends on the expertise of compensation committee members. First, based on the guidance, "Regulations Governing the Appointment and Exercise of Powers by the Remuneration Committee of a Company Whose Stock is Listed on the Stock Exchange or Traded Over the Counter", stipulated by Financial Supervisory Commission, the member of a compensation committee should meet any of the following expertise: academic background, professional certificates, or business experiences. Our empirical results show that when the majority members of the compensation committee are with academic background, the compensation committee will use stock market performance based RPE in the executive compensation. Besides, when the majority of the compensation committee members are with financial or accounting expertise, the compensation committee will apply the stock market performance based RPE in the executive compensation. Collectively, in order to meet the policy objective, the regulator should reconsider the effectiveness of the current guidance, and require in the future the compensation committee members to possess the financial or accounting expertise.