The effect of FAS 106 on chief executive compensation

We investigate whether CEO cash compensation is shielded from the significant negative earnings effect of the adoption of FAS 106, Employers' Accounting for Postretirement Benefits other than Pensions and whether CEO compensation is adjusted to reflect reductions in post retirement benefits taken from employees. The intervention hypothesis posits that compensation committees actively make adjustments to executive compensation for specific earnings components to reward CEOs for their contribution to firm value. Using within firm, longitudinal analyses, we find that the effects of FAS 106 on CEO cash compensation depend on whether post retirement benefits are reduced. Firms that cut post retirement benefits reward the CEO for value-increasing benefit cuts despite the earnings reduction caused by adoption of FAS 106, while firms that do not cut benefits ignore the earnings reduction caused by FAS 106.