Do institutional framework and its threshold matter in the sensitivity of CEO pay to firm performance? Fresh insights from an emerging market economy

Abstract

This study examines the role of institutional quality and its threshold in the sensitivity of CEO pay to firm performance in an emerging market economy, using a generalized method of moments, Driscoll and Kraay's nonparametric covariance matrix estimator, and robust dynamic panel threshold. Bureaucratic quality and corruption control weaken performance‐based pay for CEOs, while law and order strengthen it. The overall institutions allow boardroom backscratching which biases executive compensation contracts. The study shows that the country operates below the institutional quality threshold values required to spur performance‐based pay for CEOs. The study concludes that institutions matter in CEO pay‐firm performance nexus.

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

“…Strong evidence of CD indicates a high level of rivalry and competition among banks, which could stir actions and reactions in the course of performing their functions and operations. This reveals the necessity of incorporating the issues of intertwining and interdependence among banks when designing and implementing policies on the CEO pay–bank performance causal nexus (Olaniyi et al, 2022; Olaniyi et al, 2023). Furthermore, it is clear that banks are not free from intertwining and interdependence in terms of efficiency (cost and technical) and profitability.…”

“…This competition tends to spur executive compensation packages and incentives of one bank to influence that of others in the industry (Bocharova & Rymanov, 2022). This portrays that banks' executive compensation contracts are not independent, as it is implicitly assumed in the existing research (Olaniyi et al, 2022; Olaniyi et al, 2023). Thus, a bank will consider other banks' executive compensation contracts when deciding how much to pay their executives to remain competitive in the hunt for vibrant and promising CEOs.…”

“…This process helped to reduce rent‐seeking activities and opportunistic tendencies of the executives, as well as transfer some level of risks to them. On the other hand, managerial power theory opines that there is a high likelihood for powerful CEOs to engage in board politics to hijack and maneuver the executive compensation contracts to influence their salaries and bonuses at the expense of firm performance and shareholders' interests (Bebchuk & Fried, 2005; Chen & Hassan, 2022; Olaniyi et al, 2022). The theory posits that CEO pay could be shrouded in sharp practices and manipulative moves orchestrated by powerful CEOs in connivance with board members (Agyei‐Boapeah et al, 2019; Ahmed et al, 2023; Sarhan et al, 2019).…”

Do business strategies vary across firms in the banking industry? New perspectives from the bank size–profitability nexus

“…Besides, these banks are not independent in terms of profitability, efficiency, and size. It is revealed that all the extant studies on the causality between firm size and profitability/efficiency must have overestimated their models by ignoring the issues of CD in their empirical analyses (Olaniyi, Young, et al, 2022). This justifies the adoption of Dumitrescu and Hurlin's (2012) approach to Granger non‐causality, which perfectly captures and deals with the issue of CD.…”

“…This assumption is practically unrealistic in the real competitive world. In many ways, firms are intertwined and interdependent in their functions and operations (Olaniyi, Young, et al, 2022). Growth in size of a listed firm in an industry may constitute a big threat to other firms and it could incite actions and reactions.…”