Firm performance, corporate governance
and executive compensation in Pakistan
Item Type Article
Authors Sheikh, M.F.; Shah, S.Z.A.; Akbar, Saeed
Citation Sheikh MF, Shah SZA and Akbar S (2018) Firm performance,
corporate governance and executive compensation in Pakistan.
Applied Economics. 50 (18):2012-2027.
Rights © 2017 Taylor & Francis. This is an Author's Original
Manuscript of an article published by Taylor & Francis
in Applied Economics in 2017 available online at https://
doi.org/10.1080/00036846.2017.1386277
Download date 10/08/2022 08:09:24
Link to Item http://hdl.handle.net/10454/17134
See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/320065388
Firm Performance, Corporate Governance and Executive Compensation in
Pakistan
ArticleinApplied Economics · January 2018
DOI: 10.1080/00036846.2017.1386277
CITATIONS
6
READS
567
3 authors:
Some of the authors of this publication are also working on these related projects:
International Evidence on the Determinants of Organisational Ethical Vulnerability View project
Effectiveness of Performance Appraisal View project
Muhammad Fayyaz Sheikh
Government College University Faisalabad
8 PUBLICATIONS30 CITATIONS
SEE PROFILE
Syed Zulfiqar Ali Shah
Warwick Business School
32 PUBLICATIONS317 CITATIONS
SEE PROFILE
Saeed Akbar
University of Bradford
38 PUBLICATIONS552 CITATIONS
SEE PROFILE
All content following this page was uploaded by Syed Zulfiqar Ali Shah on 05 October 2017.
The user has requested enhancement of the downloaded file.
1
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 (KSE) over the period 2005 to 2012, we find that both current and
previous year accounting performance 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.
Key Words: Corporate Governance, Dynamic Panel, Emerging Markets, Executive
Compensation, Firm Performance, Fixed Effects
Please cite this paper as:
Sheikh, M.F., Shah, S.Z.A., and Akbar, S., (2017), ‘Firm Performance, Corporate
Governance and Executive Compensation in Pakistan.’ Applied Economics, DOI:
10.1080/00036846.2017.1386277. Forthcoming.
2
Introduction
There has been an enormous growth in research on executive compensation over the last two
decades with primary focus on compensation of chief executive officer (CEO). Much of this
research focuses on the question whether executive compensation contracts can be justified in
terms of their contribution to the firm financial performance (Devers et al., 2007, van Essen et al.,
2012a). According to agency theory (Jensen and Meckling, 1976), executives are self-interested
and may behave opportunistically at the expense of shareholders’ interests. Therefore, corporate
boards are supposed to confine executive opportunism and align the executives’ interests with that
of shareholders by better monitoring through effective corporate governance mechanisms, and
designing efficient pay contracts that typically link executive compensation with firm
performance.
The objective of this study is to examine whether CEO compensation is influenced by firm
performance and corporate governance practices in an emerging market, Pakistan, where CEOs
are presumed to be more powerful than the boards of directors and where family or controlling
shareholders are more likely to exploit interests of minority shareholders. Specifically, this study
examines the role of firm performance, board structure and concentrated/family ownership in
designing CEO compensation contracts.
The Asian socio-economic and behavioral peculiarities and institutional settings are different
from Western World and studies conducted in Western World have limited implications for Asian
countries (Fan et al., 2011, Ghosh, 2006, Gibson, 2003, Hofstede, 1980, Sun et al., 2010, van Essen
et al., 2012a). While there is some evidence on the link between firm performance, corporate
governance and compensation from other Asian countries, the Pakistani context is peculiar for a
number of reasons. First, concentrated and family ownership is more common in Pakistan than for
3
instance, in Japan and Korea. Similarly, while Chinese firms have more ownership concentration
than in Pakistan, the nature of ownership concentration in Chinese firms is different as the State
usually holds high stakes in large firms (e.g., Bryson et al., 2014). On the other hand, concentrated
ownership in Pakistan is maintained by non-government shareholders. Non-government
ownership concentration makes firms like private owned firms which may have different
implications for CEO compensation.
Second, legal and political environment in Pakistan is weaker and the overall governance is
poor (Rehman et al., 2012). The government effectiveness index and regulatory quality index
estimated by World Bank remained negative in the last decade or so. In addition, there is more
foreign influence on governance and corporate environment. Pakistan has been under the influence
of International Monetary Fund (IMF) and other funding agencies for so long. Moreover, Pakistani
economy is plagued with more corruption than many other Asian countries. According to
Transparency International, the Corruption Perception Index (CPI) never cross 30 for Pakistan
(100 shows no corruption). Therefore, people in Pakistan (including executives) are more prone to
unethical and opportunistic behavior (Mujtaba and Afza, 2011). Third, the disclosure requirement
about CEO compensation is stronger in Pakistan. Companies are required to report all the
components of CEO compensation. This is not the case for most of the other Asian countries (see,
e.g., Basu et al., 2007, Conyon and He, 2011, Kato et al., 2007).
Given above differences, Pakistani market provides a unique context to study how the boards
see firm performance as a determinant of CEO compensation? What role concentrated/family
ownership plays in setting CEO pay and how board structure affects CEO compensation decisions?
These questions are particularly interesting in countries like Pakistan as two seminal studies
