Evaluation of the impact of the pay gap on performance - A study of dual system banking

Abstract

This study examines the effect of the pay gap on banks and compares the effectiveness of the tournament theory in Islamic banks (IB) and conventional banks (CB). This study expands the pay gap indicators used in previous studies by using three indicators: board of directors’ pay gap, commissioners’ pay gap and employees’ pay gap. The sample is 23 banks, observed from 2009 to 2019, which results in 239 bank-years. The test results show that we have not found a relationship between a pay gap and bank performance. However, the subsample test, which involves separating Islamic banks and conventional banks, reports different findings. The tournament theory is effectively applied to the employee payroll system and shows a large employee pay gap will improve the performance of IBs and CBs. However, the effect of tournaments on IBs is greater than it is on CBs. The tournament theory is not effectively applied to the salary system for the boards of commissioners. However, the large pay gap for board of directors of CBs causes communication, coordination and collaboration problems between the board of directors and further reduces bank performance. However, in IBs, the pay gap of board of directors has no effect on bank performance. We recommend that banks should provide different salaries for employees at the various different levels. However, we do not recommend that banks create a large pay gap for board of directors because this will lead to poorer performance.

Keywords:

• Pay gap
• communication
• coordination
• tournament theory
• Islamic bank

PUBLIC INTEREST STATEMENT

Scholar has widely explained the literature on tournament theory. However, their study emphasizes the salary gap between employees and directors. This study extends the previous study by explaining the effectiveness of tournament theory on the pay gap policy between employees, commissioners, and directors. In addition, we examine the impact of this tournament theory on Islamic banks and conventional banks. We distinguish the two banks because they have different principles and operations, and Islamic banks use Islamic law as the basis for their operations. The test results using this subsample show the effectiveness of different tournament theories. Islamic banks also emphasize Islamic law as an organizational culture so that it has an impact on employee behavior. The test results show that tournament theory is more effective for Islamic bank employees than for conventional banks.

Acknowledgements

The authors would like to thank the Universitas Negeri Semarang (UNNES), Indonesia, for funding this research. Also, the authors appreciate and thank you for the constructive comments forwarded by the referee of the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Author statement

All authors is a lecturers and researchers in the field of Islamic finance. One of his focuses is on the performance evaluation of Islamic banks (IB). This paper focuses on the theoretical tournament in Islamic banks by emphasizing the payroll system. Islamic banks and conventional banks have different principles, operations, and cultures, resulting in different performance outputs. This paper encourages banks to make appropriate payroll policies to improve their performance.

Additional information

Funding

The authors received a grant from the Institute for Research and Community Service (LPPM) of Semarang State University (UNNES).

Notes on contributors

S Martono

S Martono is a professor of management at the Faculty of Economics, Universitas Negeri Semarang, Indonesia. His areas of research interests are human resource management, management information system, and leadership. He can be contacted at email: [email protected].

Fachrurrozie Fachrurrozie

Fachrurrozie Fachrurrozie is a lecturer at the Faculty of Economics, Universitas Negeri Semarang, Indonesia. His areas of research interests are accounting and finance. He can be contacted at email: [email protected].

Hasan Mukhibad

Hasan Mukhibad is a lecturer at the Faculty of Economics, Universitas Negeri Semarang, Indonesia. He is an editor in chief of Jurnal Dinamika Akuntansi. His areas of research interests are Islamic accounting and Islamic banking. He can be contacted at email: [email protected].

Ahmad Nurkhin

Ahmad Nurkhin is a lecturer at Faculty of Economics, Universitas Negeri Semarang, Indonesia. His field of research interest is accounting education. He can be contacted at email: [email protected].

Kusumantoro Kusumantoro

Kusumantoro Kusumantoro is lecturer at Faculty of Economics Universitas Negeri Semarang, Indonesia. His research field is economics education. He can be contacted at email: [email protected].