Directors’ remuneration, corporate governance and firm performance linkages: Evidence from the emerging country

Abstract

The study examines the trends and patterns in remuneration of directors working for the largest 30 listed companies in India over the past 18 years, i.e., from 2002 to 2019. It tries to establish short-term and long-run relationships between the director’s remuneration and firm performance after controlling for the firm’s size, governance, leverage, and risk for the sample companies. The study found a significant increase in remuneration for the period of study, especially after the new guidelines on executive remuneration in the Indian Companies Act, 2013. It also confirms a change in the composition of the remuneration in the last five years wherein the proportion of fixed component (salary) has increased, and the component of variable components (bonus/commission, perquisites) have declined. Results also confirm a short-term bi-directional association between directors’ remuneration and firm performance variables. Further, the outcomes of the panel least square regression confirm the subsistence of a strong pay-performance association for the variable components of directors’ remuneration. Furthermore, the paper also found a positive relationship with board size indicating larger boards fail to exercise control on paying excessive remuneration to its directors. The positive relationship reported among directors’ remuneration and firm performance measures is partially in line with past studies (Chakrabarti, Subramanian, Yadav, & Yadav, 2012; Ghosh, 2006; Ozkan, 2011). However, our results contradict the existing relationship with board size and directors’ remuneration highlighting the need to strengthen governance mechanism in the Indian scenario.

Trends and Patterns in Indian Board Structure

“…On the other hand, smaller boards are preferred by companies for avoiding free-riding benefits and quick decision-making (Kumar & Singh 2013) thus, better impact on firm value (Eisenberg et al 1998). Also, smaller boards keep control of the excessive remuneration of directors (Soni & Singh 2020). Also, studies like Martin and Herroro (2018) reported no significant relationship between board size and firm performance.…”

Do the same executive compensation strategies and policies fit all the firms in the banking industry? New empirical insights from the CEO pay–firm performance causal nexus

“…Meanwhile, the theoretical perspective and research outcomes have remained contentious and inconclusive. Some scholars view CEO pay as a reward for performance by stressing performance‐based pay for CEOs (Adeusi, 2021; Bhuyan et al, 2022; Buck et al, 2008; Edem et al, 2021; Fama, 1980; Jatana, 2023; Kurawa & Kabiru, 2014; Obembe et al, 2016; Olaniyi & Obembe, 2017; Olaniyi, Obembe, & Oni, 2017; Olaniyi & Olayeni, 2020; Saidu & Alkhawlani, 2017; Soni & Singh, 2020; Umobong & Bele–Egberi, 2019). The principle underlies performance as a major determinant of CEO pay (Khursheed & Sheikh, 2022; Kweh et al, 2022).…”