Do Corporate Governance Mechanism Influence CEO’s Compensation? An Evidence from Pakistan’s Banking Sector
Ambreen Kashif * and Ramshah Rashid Lone*
Lahore School of Economics, Pakistan *
Abstract: Chief executive officers (CEOs) compensation is now a day’s considered a highly debatable topic among academics and practitioners both. An extensive literature exits, that has examined multiple factors affecting the level of chief executive’s remuneration. CEO is the most influential employee of an organization, who has the ability to create or deteriorate the company’s value. To avoid the problem of agency cost, the most important task that a firm can do is to take into consideration the CEO's performance. It is the responsibility of the board of directors to oversee the CEO’s performance, because better control by the board in the form of governance and an appropriate pay package for the CEO, can motivate the CEO to perform in the best interest of the shareholders and improve overall performance of the company. The decision made by the board regarding the CEO's compensation, can affect the performance of the firm either in the favour of the shareholder in form of more profit or it might lead to a loss situation for shareholders when a CEO gets compensated without keeping performance into consideration.
Understanding the complexity associated with CEO’s remuneration, this paper is an extension of author’s previous study, and is an attempt to highlight a developing country’s perspective by identifying the mediating effect of the performance, bank size along with understanding the moderating effect of governance mechanisms on CEO’s remuneration. Pakistan’s Banking Sector represents a definite case of very high salaries and compensation packages, especially for the top level staff such as CEO and the directors.
This paper uses panel data of 22 listed banks in Pakistan for the period 2006-2013 and explores the model that best explains the relationship between CEO compensation and following variables: Firm Performance, Firm Size, CEO tenure, and Governance Mechanism.
Keywords: CEO Compensation, Corporate Governance Mechanism, Banks
