Past Performance and Executive compensation: Evidence from Indonesia

Abstract

This research examine the pay-for-performance hypothesis by studying Indonesian firms during the global financial crisis. Controlling for some firm fundamental factors and industry, we find that there is strong evidence that past performance drives the compensation paid to executives. This paper also reveals that financial firms tend to compensate their executive higher than those of non-financial firms. State-owned firms compensate a higher salary for their directors and commissioners than those of privately owned firms. Pay-for-performance system might reduce the agency problem between managers and shareholders, on the other side; however, this system might also reinforce the incentive for managers to take risk which subsequently increases the degree of riskiness of firms.