Setting CEO Remuneration in Pakistan: Comparing Theory and Practice

Abstract

Purpose - The current study examines the explanatory power of four main theories (Agency, Stakeholder, Management Power, and Institutional) for setting CEO remuneration in Pakistan. As such, the study evaluates CEO remuneration from a country-specific perspective. Design/methodology/approach - Data for 58 non-financial firms is collected for the past ten years (from 2012 to 2021) for the examination. GMM/IV approach is used for estimating the output to control the potential endogeneity problem. The study also applies the Fixed Effects EGLS estimation approach as a robustness check while changing certain proxies. Findings - The results show evidence to support the explanatory power of all four theories selected for the examination when determining CEO remuneration in Pakistan. Based on the results of the study, the order of importance or explanatory power (from highest to lowest) of the theories is: (i) Agency theory (represented by firm performance), (ii) Management Power theory (represented by firm size), (iii) Stakeholder theory (represented by CSR and sustainable practices), and (iv) Institutional theory (represented by governance and CEO-specific factors). Therefore, the study concludes that in Pakistan, CEO remuneration is set following the notions of Agency theory, where the primary aim of the Board is to align the interests of the CEO with the shareholders. Practical Implications-The major practical implication of the current study relates to setting an optimal CEO remuneration policy. The study empirically shows which factors play a role in setting CEO remuneration in Pakistan, providing an avenue of reassessing and refining the policy as and when needed, as the external factors change. However, improving the sample size and examining the relationship of Stakeholder theory with aspects like ESG (environmental, social, and governance) disclosures would further improve the quality and generalizability of the study. Originality/value - Available literature covering CEO remuneration is quite diverse, however, as scholars have examined it using different theoretical approaches, the results are inconclusive. As such, there is a need to establish the explanatory powers of different theorized relationships for CEO remuneration and consider how CEO remuneration is determined in practice. Furthermore, the studies covering different countries and markets show different results, reflecting the importance of considering institutional and market settings when inferring the results. Both these gaps are addressed in the current study.