Directors’ remuneration, corporate governance and firm performance linkages: Evidence from the emerging country

Abstract

The study examines the trends and patterns in remuneration of directors working for the largest 30 listed companies in India over the past 18 years, i.e., from 2002 to 2019. It tries to establish short-term and long-run relationships between the director’s remuneration and firm performance after controlling for the firm’s size, governance, leverage, and risk for the sample companies. The study found a significant increase in remuneration for the period of study, especially after the new guidelines on executive remuneration in the Indian Companies Act, 2013. It also confirms a change in the composition of the remuneration in the last five years wherein the proportion of fixed component (salary) has increased, and the component of variable components (bonus/commission, perquisites) have declined. Results also confirm a short-term bi-directional association between directors’ remuneration and firm performance variables. Further, the outcomes of the panel least square regression confirm the subsistence of a strong pay-performance association for the variable components of directors’ remuneration. Furthermore, the paper also found a positive relationship with board size indicating larger boards fail to exercise control on paying excessive remuneration to its directors. The positive relationship reported among directors’ remuneration and firm performance measures is partially in line with past studies (Chakrabarti, Subramanian, Yadav, & Yadav, 2012; Ghosh, 2006; Ozkan, 2011). However, our results contradict the existing relationship with board size and directors’ remuneration highlighting the need to strengthen governance mechanism in the Indian scenario.