The Design of Top Executive Compensation Contracts Based on the Timeliness of Accounting Earnings: The Role of the Board of Directors

The purpose of this paper is to empirically examine whether the effectiveness of the board( or the degree of director incentive alignment) is associated with the design of top executive compensation contracts based on the timeliness of earnings. This study refers to the extent to which a board of directors exhibits characteristics consistent with the ability and incentive to monitor and evaluate top management in the interests of the firm's shareholders as the degree of board's effectiveness or director incentive alignment. This paper predicts that when the degree of director incentive alignment is higher, the incentive weight on earnings is more likely to embed the timeliness of earnings to capture dynamic aspects of the marginal product of current period action not captured by current period earnings. Using a sample of Taiwanese listed firms, this study finds that the positive relation between measures of earnings timeliness and measures of executive compensation-earnings sensitivity are significantly stronger as the board's effectiveness increases. This result supports the prediction that the more effective board would design more incentive-aligned executive compensation contracts to mitigate the managerial moral hazard problem.