“Executive Compensation-Firm Performance relationship: A perspective from India”

Authors

  • Dr. Arti Chandani Associate Professor, Symbiosis Institute of Management Studies, Symbiosis International (Deemed University), Pune, MH, India Author
  • Dr. Mita Mehta Associate Professor, Symbiosis Institute of Management Studies, Symbiosis International (Deemed University), Pune, MH, India Author
  • Dr. Harsha Sarvaiya, Griffith University, Australia Author

DOI:

https://doi.org/10.61841/bsdhwy25

Keywords:

Corporate Governance,, Executive Compensation, Firm’s performance, Indian listed firms, transparency

Abstract

The Indian Companies Act, 2013 under section 197 contains provision towards maximum managerial remuneration. The total remuneration to directors and managers should not exceed 11% of its net profit for the financial year. There are other provisions relating to the payment of remuneration which act as the measures to control any abnormal behaviour of management towards payment of remuneration. There are firms, headed by CEO, who were paid too much at the expense of the stakeholders, which also manifests executives’ self-interest with complete lack of accountability for stakeholders and a gloomy picture of corporate governance.

 

This study aims to examine the relationship between executive compensation and firm performance of BSE 200 listed firms in India. There has been research in this area in the countries such as US, UK and other countries, however little literature is available in emerging economies especially in the India. The amount of literature of executive pay and firm performance, which is available for Indian companies, is very limited. There is dearth of recent literature on executive pay and firm performance with recent data. Also, we could not find a study or research where executive compensation and pay performance, market based and accounting based, has been studied. Therefore, this study finds a unique place in the existing literature. Present study is based on the executive compensation for the year 2017 where data has been collected from Bloomberg and Prowess. Size of the firm is a significant variable in explaining executive compensation. Firm’s performance is a major factor affecting executive compensation. The pay performance relationship does not hold true in the case of small firms in the sample. Firms’ performance, market based and accounting based, is negatively correlated with executive compensation.

Downloads

Download data is not yet available.

References

• Balasubramanian, N., Black, B. S., & Khanna, V. (2010). The relation between firm-level corporate governance and market value: A case study of India. Emerging Markets Review, 11(4), 319-340.

• Balsam, S., Bartov, E., & Marquardt, C. (2002). Accruals management, investor sophistication, and equity valuation: Evidence from 10–Q filings. Journal of Accounting Research, 40(4), 987-1012.

• Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. The Journal of Economic Perspectives: A Journal of the American Economic Association, 17(3), 71–92.

• Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of corporate finance, 14(3), 257-273.

• Bhattacharyya, A. K., & Rao, S. V. (2005). Economic impact of ‘regulation on corporate governance’: Evidence from India. Accessible via: http://econpapers. repec. org/paper/wpawuwpfi/0504002. htm.

• Bhattacherjee, A. (1998). Managerial influences on intraorganizational information technology use: A Principal‐agent model. Decision Sciences, 29(1), 139-162.

• Bhattacherjee, D., Jairam, S., & Shanker, G. R. (1998). Top management remuneration and firm performance: an exploratory analysis. Economic and Political Weekly, M10-M15.

• Chakrabarti, R., Subramanian, K., Yadav, P. K., & Yadav, Y. (2012). 21 Executive compensation in India. Research handbook on executive pay, 435.

• Chen, J. J., Liu, X., & Li, W. (2010). The effect of insider control and global benchmarks on Chinese executive compensation. Corporate Governance: An International Review, 18(2), 107-123.

• Cheng, S., & Firth, M. (2006). Family ownership, corporate governance, and top executive compensation. Managerial and Decision Economics, 27(7), 549-561.

• Conyon, M. J., & He, L. (2011). Executive compensation and corporate governance in China. Journal of Corporate Finance, 17(4), 1158-1175.

• Core, J. E., Holthausen, R. W., & Larcker, D. F. (1999). Corporate governance, chief executive officer compensation, and firm performance1. Journal of financial economics, 51(3), 371-406.

• Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and Economics, 26(2), 301-325.

• Ghosh, A. (2003). Board structure, executive compensation and firm performance in emerging economies: Evidence from India. Indira Gandhi Institute of Development Research.

• Grossman, S. J., & Hart, O. D. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of political economy, 94(4), 691-719.

• Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. The journal of finance, 58(6), 2351-2374.

• Hölmstrom, B. (1979). Moral hazard and observability. The Bell journal of economics, 74-91.

• https://www.sebi.gov.in/legal/circulars/oct-2004/corporate-governance-in-listed-companies-clause-49- of-the-listing-agreement_13153.html, accessed on 27.07.18

• Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.

• Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of political economy, 98(2), 225-264.

• Jensen, M. C., & Warner, J. B. (1988). The distribution of power among corporate managers, shareholders, and directors. Journal of Financial Economics, 20, 3-24.

• Kato, T., & Long, C. (2006). Executive compensation, firm performance, and corporate governance in China: Evidence from firms listed in the Shanghai and Shenzhen Stock Exchanges. Economic development and Cultural change, 54(4), 945-983.

• Khanna, T., & Palepu, K. G. (2010). Winning in emerging markets: A road map for strategy and execution. Harvard Business Press.

• M.J. Conyon, L. He / Journal of Corporate Finance 17 (2011) 1158–1175

• Mehran, H. (1995). Executive compensation structure, ownership, and firm performance. Journal of financial economics, 38(2), 163-184.

• Mirrlees, J. A. (1976). The optimal structure of incentives and authority within an organization. The Bell Journal of Economics, 105-131.

• Murphy, K. J. (1985). Corporate performance and managerial remuneration: An empirical analysis. Journal of accounting and economics, 7(1-3), 11-42.

• Murphy, K. J. (1999). Executive compensation. Handbook of labor economics, 3, 2485-2563.

• Narayanaswamy, R., Raghunandan, K., & Rama, D. V. (2012). Corporate governance in the Indian context. Accounting Horizons, 26(3), 583-599.

• Parthasarathy, A., Menon, K., & Bhattacherjee, D. (2006). Executive compensation, firm performance and governance: an empirical analysis. Economic and Political weekly, 4139-4147.

• Raithatha, M., & Komera, S. (2016). Executive compensation and firm performance: Evidence from Indian firms. IIMB Management Review, 28(3), 160-169.

• Ramaswamy, K., Veliyath, R., & Gomes, L. (2000). A study of the determinants of CEO compensation in India. MIR: Management International Review, 167-191.

• Shivdasani, A. (1993). Board composition, ownership structure, and hostile takeovers. Journal of accounting and economics, 16(1-3), 167-198.

• Swami, P. (2005). India’s highest paid executives’. Business India, November, 7, 62.

• Wang, K., & Xiao, X. (2011). Controlling shareholders’ tunneling and executive compensation: Evidence from China. Journal of Accounting and Public Policy, 30(1), 89-100.

Downloads

Published

30.11.2020

Issue

Vol. 24 No. 9 (2020): 24 (9) 2020

Section

Articles

License

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

You are free to:

  1. Share — copy and redistribute the material in any medium or format for any purpose, even commercially.
  2. Adapt — remix, transform, and build upon the material for any purpose, even commercially.
  3. The licensor cannot revoke these freedoms as long as you follow the license terms.

Under the following terms:

  1. Attribution — You must give appropriate credit , provide a link to the license, and indicate if changes were made . You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
  2. No additional restrictions — You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits.

Notices:

You do not have to comply with the license for elements of the material in the public domain or where your use is permitted by an applicable exception or limitation .

No warranties are given. The license may not give you all of the permissions necessary for your intended use. For example, other rights such as publicity, privacy, or moral rights may limit how you use the material.

How to Cite

Chandani, A., Mehta, M., & Sarvaiya, H. (2020). “Executive Compensation-Firm Performance relationship: A perspective from India”. International Journal of Psychosocial Rehabilitation, 24(9), 212-220. https://doi.org/10.61841/bsdhwy25