Accounting Compensation Modeling Using The Analytic Hierarchy Process Supporting The Sarbanes-Oxley Act

Abstract

The Sarbanes-Oxley Act (SOA) of 2002 included a wide range of reforms for issuers of publicly traded securities, auditors, corporate board members, and lawyers. It was aimed at deterring and punishing corporate and accounting fraud with severe penalties for wrongdoers, and protecting the interests of workers and shareholders. The SOA along with the economic downturn of 2008 and the subsequent passing of the Dodd-Frank Act has focused additional attention to executive compensation especially for CEOs. This paper proposes that the Analytic Hierarchy Process (AHP) may be useful in developing input to compensation contracts in ways that support regulations and the interests of investors and stockholders. AHP is suggested as a framework to explore when considering the factors that can be used to measure the performance of a CEO. Seven reasons for using AHP for this purpose are presented in this report: (1) emphasizes objectivity and consistency, (2) creates an audit trail for compensation agreements, (3) improves understanding between CEOs and compensation committees, (4) supports review and updating CEO compensation contracts, (5) augments CEO selection, (6) supports SOA and Dodd-Frank Act, and (7) may attract investors.