Academic journal article Indian Journal of Industrial Relations

Independence of Remuneration Committee & Executive Remuneration in India

Academic journal article Indian Journal of Industrial Relations

Independence of Remuneration Committee & Executive Remuneration in India

Article excerpt

The present study explores the impact of independence of remuneration committee on the remuneration of executive directors in a sample of 51 listed companies in India for a period from 2003 to 2012. In companies having fully independent remuneration committees and independent chairmen, a negative impact of accounting performance has been found on the executive remuneration. However, results reveal a positive and significant impact of market performance on the executive remuneration. In the presence of an independent chairman of remuneration committee, promoters' shareholding has been observed negatively related with the executive remuneration. These findings can be useful for the regulatory authorities in framing and improving norms regarding the determination of executive remuneration.


The debate about executive remuneration has focused on three elements: structure, governance and disclosure (Ferrarini et al., 2003). Any governance mechanism designed to regulate executive remuneration should ensure the coverage of all these elements. The regulation should increase the possibility that the remuneration setting maximizes shareholder interests and does not become a skimming process in which the board is captured by management. In Anglo-American corporate governance, two devices have been developed to reduce the risk of a board's capture: the appointment of independent directors to the board and the creation of a remuneration committee consisting of non-executive/independent directors (Ferrarini et al., 2003). For efficient regulation, corporate governance codes have been introduced by almost all the countries in the recent past. For instance, the Combined Code on Corporate Governance, 2003 (UK); NYSE Listing Standards, 2004 (USA); Code of Corporate Governance, 2005 (Singapore); and Since 2003, ASX Corporate Governance Council (Australia) have been developing and re leasing recommendations on the corporate governance practices to be adopted by the listed entities.

In its effort to match with international best practices and improve the effectiveness of corporate boards and its committees, the Securities and Exchange Board of India (SEBI) has also introduced regulations. Since the notification of the Clause 49 on February 21, 2000, corporate governance regulations in India have rapidly evolved. Following the enactment of the Companies Act, 2013, the updated version of CL49 was notified on April 17, 2014. Based on the industry response, some provisions in CL49 were amended and the SEBI (Listing Obligations & Disclosure Requirements) Regulations were notified on September 2, 2015 (Sarkar, 2015). Clause 49 states that the board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company's policy on specific remuneration packages for executive directors including pension rights and any compensation payment. The formation of remuneration committee was non-mandatory till 2013, but the Companies Act 2013 made it mandatory to have nomination and remuneration committee consisting of three or more non-executive directors, out of which not less than one-half shall be independent directors. As the remuneration committee is responsible for fixation of remuneration of the executive directors, it is important to examine the role of remuneration committee in setting pay of directors. The present paper attempts to examine the impact of independence of remuneration committee in determining the remuneration of executive directors of the listed companies in India. It also studies how the independence of remuneration committee affects the relationship of company performance, promoters' shareholding, and ownership concentration with the executive remuneration.

Review of Literature

The impact of presence or absence of the remuneration committee on the pay packages of CEOs and directors has been examined by only a few researchers. …

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