Academic journal article International Journal of Management

Corporate Governance, Executive Pay and Firm Performance: Evidence from Bangladesh

Academic journal article International Journal of Management

Corporate Governance, Executive Pay and Firm Performance: Evidence from Bangladesh

Article excerpt

This study examines the relationship between executive pay and firm performance in Bangladesh. While doing so it examines the ownership structure and board practices on executive pay and pay-performance sensitivity. It is found that there is no significant relationship between ownership structure and executive pay. There is a significant positive relationship between board composition and executive pay; there is a significant negative relationship between board size and executive pay and CEO duality and executive pay. However, there is a positive relationship between executive pay and firm performance. These findings imply that the executives who have significant ownership stakes in the firm are not necessarily extracting rent in the form of executive pay even though they have a consolidation of powers (CEO duality). Insider representation in the board and management along with the consolidation of powers may have reduced the need for performance related pay and their monitoring skill may have allowed enhancing firm economic performance.

(ProQuest: ... denotes formulae omitted.)

Introduction

Executive compensation is one of the most debated topics in corporate governance literature (BanghÓj et al, 2010; Barontini and Bozzi, 2011). There was a concern long before if the well paid executives are performing well (see Jensen and Murphy, 1990a). It is argued that they are paid like bureaucrats and the annual changes in executive compensation do not reflect the changes in corporate performance (Jensen and Murphy, 1990a; 1 990b); executives of bad firms receive larger wages (Friebel and Marros, 2005). It intensified if the well paid executives are working well and spending significant time for their company following the mega corporate collapses in early 2000s, such as collapse of Enron, WorldCom and HIH. Hannafey (2003) maintains that whether the highly paid executives may influence the firm economic performance is a complex, challenging, and often highly emotional issue. It is complained that the highly paid CEOs are sometimes underperforming and the award winning CEOs are spending significant time and effort on public and private activities outside their company, such as assuming board seats or writing books (Malmendier and Tate, 2005). Jensen and Murphy (2004, ? 50) remarked that "while remuneration can be a solution to agency problems, it can also be a source of agency problems". The debate of executive pay attracted renewed attention following the receipt of federal bailout money by the executives of most distressed financial institutions in the United States. Therefore, the billion dollar stimulus package signed by U. S. President Barack Obama, limits on the pay and bonuses of the 20 top-earning executives at companies receiving federal bailout money (Bartiromo, 2009). President Obama further imposed a $500,000 cap on senior executives' pay for the most distressed financial institutions receiving taxpayer bailout money and promised new steps to end a system of "executives being rewarded for failure" (Dean, 2010).

Although it is argued that Optimal contracting approach' may play a key role in resolving the agency problem there being a concern in the corporate governance literature if the well paid executives are performing well (Jensen and Murphy, 1990a). If the executives are paid based on share options and share based compensation, the poorly designed or implemented share based compensation plan may lead to excessive compensation that may destroy the organizational value (Jensen, and Murphy, 2004); when the compensation is largely based on share options, the managers may maximize the short term shareholders benefit to increase their own compensation (Maher and Anderson, 1999); if the executives are rewarded on the basis of accounting profits, they will tend to manipulate the accounting numbers to improve their apparent performance or will adopt a particular accounting method that will increase the accounting profit (Deegan, 2006; Godfrey et al, 2006). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.