Firm performance, corporate governance and executive compensation in Pakistan

ABSTRACT

This study examines the effects of firm performance and corporate governance on chief executive officer (CEO) compensation in an emerging market, Pakistan. Using a more robust Generalized Method of Moments (GMM) estimation approach for a sample of non-financial firms listed at Karachi Stock Exchange over the period 2005–2012, we find that both current- and previous-year accounting performances has positive influence on CEO compensation. However, stock market performance does not appear to have a positive impact on executive compensation. We further find that ownership concentration is positively related with CEO compensation, indicating some kind of collusion between management and largest shareholder to get personal benefits. Inconsistent with agency theory, CEO duality appears to have a negative influence, while board size and board independence have no convincing relationship with CEO compensation, indicating board ineffectiveness in reducing CEO entrenchment. The results of dynamic GMM model suggest that CEO pay is highly persistent and takes time to adjust to long-run equilibrium.

KEYWORDS:

• Corporate governance
• dynamic panel
• emerging markets
• executive compensation
• firm performance
• fixed effects

JEL CLASSIFICATION:

• G30
• M52
• G34
• C13

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Given the dominance of controlling shareholders in the developing markets, Jameson, Prevost, and Puthenpurackal (2014), for instance, call for more country-level studies to better understand the influence of controlling shareholders on minority shareholders.

² Our findings are in contrast to the results of two existing studies (Kashif and Mustafa 2012; Shah, Javed, and Abbas 2009) on CEO compensation in Pakistan. These existing studies, however, are limited in scope and do not attempt to provide rigorous analysis.

³ In the revised version of the Code of corporate governance issued in March 2012, separation of position of chairman from CEO is mandatory with effect from year 2013.

⁴ See Roodman (2009) for details.