THE EFFECT OF GOODWILL IMPAIRMENT ON CEO COMPENSATION

Abstract

Prior research has found that compensation committees shield executive cash compensation from restructuring charges (Dechow et al. 1994). I extend the research to goodwill impairment charges and executive equity compensation. I find no evidence that bonus compensation is shielded from goodwill impairment charges. However, my results show that restricted stock is partially shielded from the effects of goodwill impairment on reported income. This may be due to the increasing importance of restricted stock and decreasing importance of bonus as a percentage of CEO total compensation. I also find evidence that when the board has more long tenured directors, the compensation committee is more likely to shield executive compensation from goodwill impairment charges. This supports prior findings that when an outside director has served on a board for a longer time, his allegiance switches from shareholders to executives (Vafeas 2003, Byrd et al. 2010).