Independence of remuneration committee & executive remuneration in India.
Kang, Lakhwinder Singh ; Payal
The present study explores the impact of independence of
remuneration committee on the remuneration of executive directors in a
sample of 51 listed companies in India for a period from 2003 to 2012.
In companies having fully independent remuneration committees and
independent chairmen, a negative impact of accounting performance has
been found on the executive remuneration. However, results reveal a
positive and significant impact of market performance on the executive
remuneration. In the presence of an independent chairman of remuneration
committee, promoters' shareholding has been observed negatively
related with the executive remuneration. These findings can be useful
for the regulatory authorities in framing and improving norms regarding
the determination of executive remuneration.
Introduction
The debate about executive remuneration has focused on three
elements: structure, governance and disclosure (Ferrarini et al., 2003).
Any governance mechanism designed to regulate executive remuneration
should ensure the coverage of all these elements. The regulation should
increase the possibility that the remuneration setting maximizes
shareholder interests and does not become a skimming process in which
the board is captured by management. In Anglo-American corporate
governance, two devices have been developed to reduce the risk of a
board's capture: the appointment of independent directors to the
board and the creation of a remuneration committee consisting of
non-executive/independent directors (Ferrarini et al., 2003). For
efficient regulation, corporate governance codes have been introduced by
almost all the countries in the recent past. For instance, the Combined
Code on Corporate Governance, 2003 (UK); NYSE Listing Standards, 2004
(USA); Code of Corporate Governance, 2005 (Singapore); and Since 2003,
ASX Corporate Governance Council (Australia) have been developing and re
leasing recommendations on the corporate governance practices to be
adopted by the listed entities.
In its effort to match with international best practices and
improve the effectiveness of corporate boards and its committees, the
Securities and Exchange Board of India (SEBI) has also introduced
regulations. Since the notification of the Clause 49 on February 21,
2000, corporate governance regulations in India have rapidly evolved.
Following the enactment of the Companies Act, 2013, the updated version
of CL49 was notified on April 17, 2014. Based on the industry response,
some provisions in CL49 were amended and the SEBI (Listing Obligations
& Disclosure Requirements) Regulations were notified on September 2,
2015 (Sarkar, 2015). Clause 49 states that the board may set up a
remuneration committee to determine on their behalf and on behalf of the
shareholders with agreed terms of reference, the company's policy
on specific remuneration packages for executive directors including
pension rights and any compensation payment. The formation of
remuneration committee was non-mandatory till 2013, but the Companies
Act 2013 made it mandatory to have nomination and remuneration committee
consisting of three or more non-executive directors, out of which not
less than one-half shall be independent directors. As the remuneration
committee is responsible for fixation of remuneration of the executive
directors, it is important to examine the role of remuneration committee
in setting pay of directors. The present paper attempts to examine the
impact of independence of remuneration committee in determining the
remuneration of executive directors of the listed companies in India. It
also studies how the independence of remuneration committee affects the
relationship of company performance, promoters' shareholding, and
ownership concentration with the executive remuneration.
Review of Literature
The impact of presence or absence of the remuneration committee on
the pay packages of CEOs and directors has been examined by only a few
researchers. For example, Conyon (1997) reported that in United Kingdom,
during the period 1988-1993, the directors' compensation in
companies having remuneration committees grew at 2.6 per cent lower than
the compensation of directors of companies without remuneration
committees. But the presence of remuneration committee had not been
found having any significant influence on the relationship between
executive compensation and corporate performance. Benito and Conyon
(1999) also found no significant impact of the presence of remuneration
committee on the directors' remuneration in UK. However, they
stated that pay-performance relationship might be stronger in companies
having remuneration committees. Kuo and Yu (2014) examined the influence
of remuneration committees in aligning the com pensation of CEOs with
firm performance in a sample of 1311 Taiwanese firms for a period of
three years (2008-2011) and found that companies which have voluntarily
constituted remuneration committees early would show a stronger
pay-performance link than those companies who formed remuneration
committees mandatorily.
The findings of various studies which have examined the
relationship between composition of remuneration committees and
executive compensation are summarised in Table 1. Newman and Mozes
(1999) reported no significant impact of the presence of insiders on the
compensation of CEOs. Anderson and Bizjak (2003) concluded that neither
completely independent committees nor the dominant presence of
independent directors in remuneration committees play any role in
determining the remuneration packages for executives. Moreover, the
presence of insiders or CEO in the committee has not been found leading
to excessive executive remuneration. Vafeas (2003) found no association
of committee composition as well as the interaction between committee
composition and performance with the pay levels of CEOs. But a positive
and significant association between committee independence and CEO
compensation was reported by Sapp (2008).
The cash compensation has been found more positively related to
accounting earnings when compensation committee quality represented by
CEO appointed directors, senior directors, CEO directors, director
shareholdings, additional directorships, and committee size increased
(Sun & Cahan, 2009). Sun et al. (2009) showed that as the
compensation committee quality improved, CEO stock option grants were
more positively related with the future firm performance. Gregory-Smith
(2012) found that neither the committee size nor the committee
independence affected pay of CEOs.
Anderson and Bizjak (2003) and Sapp (2008) have used the proportion
of independent directors in remuneration committee as a proxy for the
independence of remuneration committee, whereas in other studies the
proportion of insiders, non-executives, affiliated directors,
interdependent directors, etc. are used. In the present study,
remuneration committee independence is represented through two variables
i.e. a dummy variable taking the value one if all directors of committee
are independent and another dummy variable which takes the value one if
the chairman of the remuneration committee is an independent director
and zero otherwise.
Remuneration Committee & Executive Remuneration
The directors of a company are seen as the stewards of the
resources entrusted to them by shareholders and their personal needs are
automatically fulfilled when they work towards the achievement of
organizational goals (Davis et al., 1997; Daily et al, 1998; 2003;
Wasserman, 2006; Andreas et al, 2012). The optimal contracting theory
assumes an independent role of non-executive directors in setting
remuneration of executive directors (Bebchuk et ah, 2002). According to
Ryan and Wiggins (2004), an independent board meet the economic
interests of the shareholders better. But Kaushik (2013) observed that
independent directors are failing in their independent role. Both,
'agency theory' and 'optimal contracting theory'
believe that an independent remuneration committee would ensure that
shareholders' interests are safeguarded and remuneration decisions
are made on fair and equitable basis. Thus, the independent directors
are supposed to check excessive remuneration being paid to directors and
linking it to the performance of the company. Due to increased public
awareness about various governance issues including executive
remuneration, the independent directors on remuneration committee are
expected to check the executive directors' remuneration (Abdullah,
2006).
Hypothesis 1: Independence of remuneration committee is negatively
related with the executive remuneration.
Independent Director as Chairman of Remuneration Committee
According to managerial power approach (Bebchuk et al., 2002;
Barontini & Bozzi, 2011), the presence of executive director on the
remuneration committee would give immense power to the executive
directors to decide their own pay. Greater the power of executive
directors, higher is the excess pay or rent earned by them over what
they should actually get. Independent director as the chairman of
remuneration committee is expected to ensure that the remuneration
decisions are not affected unreasonably by inside directors on the
remuneration committees. Independent director as the chairman of the
committee is anticipated to make remuneration setting process to be more
objective and reasonable.
Hypothesis 2: Independence of chairman of the remuneration
committee is negatively related with the executive remuneration.
Executive Remuneration & Performance
Many studies have reported accounting performance of a company
and/or its market performance as basis of payment to the directors. For
instance, Cladera and Gispert (2003), Fatemi et al. (2003), Ghosh
(2006), Su et al. (2010), Barontini and Bozzi (2011), Andreas et al.
(2012), Wu (2013), Chen et al. (2014) have found executive remuneration
linked positively with accounting performance whereas Ertugrul and Hegde
(2008), Barontini and Bozzi (2011) and Theeravanich (2013) found
executive remuneration linked positively with market performance of a
company. The purpose of strengthening the institution of independent
directors is to ensure the independence of the board from management.
Similarly, the purpose of setting up of a remuneration committee is to
govern the executive remuneration in a company, which is supposed to be
fair and transparent. The performance of a company is considered as an
objective and fair basis to justify the level of remuneration being paid
to executive directors. Hence, it is expected that fully independent
remuneration committees and independent chairman of the remuneration
committee would enhance the sensitivity of executive remuneration to
company performance.
Hypothesis 3a: Fully independent remuneration committees strengthen
the relationship between company's accounting performance and
executive remuneration.
Hypothesis 3b: Fully independent remuneration committees strengthen
the relationship between company's market performance and executive
remuneration.
Hypothesis 3c: The presence of an independent chairman of
remuneration committee strengthens the relationship between
company's accounting performance and executive remuneration.
Hypothesis 3d: The presence of an independent chairman of
remuneration committee strengthens the relationship between
company's market performance and executive remuneration.
Executive Remuneration & Promoters' Shareholding
Private sector firms in India are either affiliated to business
groups or are non-affiliated individual firms. Both individual and
group-affiliated firms are largely family firms with considerable equity
holdings by family members as well as family involvement in the
management of the companies. In 2003, two out of every five companies in
India typically had a promoter present on the board. More importantly,
the presence of promoters on company boards has increased significantly
over the years with a noticeable jump in 2005--approximately around the
time when stricter governance regulations became applicable to virtually
all listed companies. By 2008, every three out of five Indian companies
had a promoter on board. Thus, while the proportion of companies having
promoters as outside directors increased from 26 percent in 2003 to 33
percent in 2008, the proportion of companies with promoters as inside
directors increased from 32 percent in 2003 to 47 percent in 2008,
suggesting an escalating role of promoters in executive management. In
2003, when promoters were present on the board, they occupied the
position of either the chairman or the managing director in 80 percent
of the companies and it increased very significantly by 2008, except for
5 percent of the companies. The promoter ownership has been well over 50
percent giving the promoter absolute control over these companies, which
suggests that Indian companies (at least the large ones) are virtually
controlled by promoters in terms of both ownership as well as managerial
discretion (Sarkar, 2010).
Parthasarathy et al. (2006) found that CEOs who belonged to
promoter groups earned higher incentive pay and total compensation.
Ghosh (2006) also reported that when CEOs are related to founders, board
remuneration increases. It indicates that more the dominant position of
promoters, higher is the remuneration granted to promoters and to defend
it higher salaries to other directors as well. It corroborates the
'rent extraction hypothesis' where dominant executives
compensate themselves with much higher remuneration than the market and
company performance would allow. The presence of an independent
remuneration committee and an independent chairman of the committee
would check the strong positive relationship between promoters'
shareholding and executive remuneration.
Hypothesis 4a: Fully independent remuneration committees weaken the
positive relationship between promoters' shareholding and executive
remuneration.
Hypothesis 4b: The presence of an independent chairman of
remuneration committee weakens the positive relationship between
promoters' shareholding and executive remuneration.
Executive Remuneration & Ownership Concentration
In India, both group affiliates and standalones can be either
widely held or have concentrated ownership. However, an examination of
the ownership structure of a large sample of listed firms reveals that a
large majority of firms in India (irrespective of their ownership
affiliation) are characterized by concentrated ownership and control
structures and widely-held firms (where no shareholder controls 20
percent votes) are an exception rather than the rule. As of 2006, the
percentage of widely-held firms in a sample of 1965 listed Indian
private sector non-financial firms (accounting for more than 80 percent
of the total market capitalization) was only 5.5 percent (Sarkar, 2010).
Intensity of shareholders' supervision can be represented
through the level of ownership concentration (Dogan & Smyth, 2002;
Cladera & Gispert, 2003). Dominant owners monitor the activities of
managers (Dogan & Smyth, 2002; Cladera & Gispert, 2003), and
thus, companies need not pay incentive pay to them (Kraft &
Niederprum, 1999). Baixauli Soler and Sanchez-Marin (2015) stated that
high concentration of ownership has a significant influence on the weak
capacity of boards to adjust the executive compensation to the economic
cycles and firm's value, especially when dominant shareholders are
internal or external linked to other companies. Other researchers like
Kraft and Niederprum (1999), Doganand Smyth (2002), Cladera and Gispert
(2003), and Andreas et al. (2012) have found negative impact of
ownership concentration on managerial remuneration as well as on
pay-performance sensitivity.
The presence of an independent remuneration committee and an
independent chairman of the remuneration committee are expected to
strengthen the negative relationship between ownership concentration and
executive remuneration.
Hypothesis 5a: Fully independent remuneration committees strengthen
the negative relationship between ownership concentration and executive
remuneration.
Hypothesis 5b: The presence of an independent chairman of
remuneration committee strengthens the negative relationship between
ownership concentration and executive remuneration.
Research Methodology
All companies listed on the Bombay Stock Exchange is the universe
of this study. Top 500 companies, ranked by the Business Today magazine
(Layak, 2012) on the basis of average market capitalization for the
first half of the financial year 2012-13 were considered. Banks,
financial institutions and government companies were excluded for the
meaningful comparison of the private sector companies. Companies provide
information about the characteristics of remuneration committee in
corporate governance sections of their annual reports. All those
companies whose corporate governance reports were available for the
period of ten years starting from 200203 to 2011-12, are covered in this
study. The period of the study coincides with the implementation of the
clause 49 of listing agreement. A sample of 150 companies was selected
after initial screening. A preliminary investigation revealed that only
72 per cent of total 1500 company-year observations had remuneration
committees on their boards. For the purpose of balanced panel data
analysis, the companies having remuneration committees during all the
years of the study were considered for analysis which resulted into a
final sample of 51 companies for 10 years.
Dependent Variable
Natural log of the average remuneration paid to the executive
directors of the company is taken as the measure of executive
directors' remuneration (ExRem).
Independent Variables
Two variables have been used to represent the independence of
remuneration committees. First, a dummy variable is used to represent
independent committee (DummyIndp) which takes the value one in case all
directors are independent directors on remuneration committee and zero
otherwise. Second, a dummy variable taking value one if the chairman of
the remuneration committee is an independent director and zero otherwise
(IndpChair).
Control Variables
Several measures of company, board and ownership characteristics
are used as control variables for measuring the impact of independence
of remuneration committee on the remuneration of executive directors.
One year lagged return on assets (ROA) is measured by earnings before
interest and taxes (EBIT) divided by assets of the company. One year
lagged Tobin's Q(TQ) is calculated by the total of market value of
debt and equity divided by the total assets. Total number of directors
including executive and non-executive directors at the end of financial
year is considered to represent the board size (BSize). Remuneration
committee size (RemCom Size) is represented by the total number of
directors on it. Institutional shareholding (ISH) and promoters'
shareholding (PSH) are measured by the percentage of shares owned by
institutional investors and promoters, respectively. Ownership
concentration (OC) is represented by the percentage of shares owned by
five largest shareholders. Natural logarithm of total assets (TA) of
company at the end of financial year is used to represent the size of a
company. Leverage (Lev) is measured by the ratio of total debt to total
assets. Growth opportunities (Grow) are represented through the
market-to-book ratio at the end of financial year. Market value of the
equity is divided by the book value of equity for calculating this
ratio. Stock return volatility (SRV) is represented by the standard
deviation of the daily stock returns of the companies for the full year.
Statistical Tools
The impact of independence of remuneration committee on the
remuneration of executive directors is examined through two-way fixed
effects regression with Driscoll-Kraay standard errors. These standard
errors would provide re suits robust to heteroscedasticity,
autocorrelation and cross-sectional dependence.
Research Models
The impact of independence of remuneration committee on the
executive remuneration is assessed with the help of eight models. Model
I measures the impact of a dummy variable representing the fully
independent remuneration committees (DummyIndp) on the executive
remuneration. The model to be tested is as follows:
[ExRem.sub.it] = [DummyIndp.sub.it] + control variables +
timedummies+ [[epsilon].sub.it].... (1)
In Model II, interaction terms of fully independent remuneration
committee with company's accounting performance CDummyIndp X ROA)
and company's market performance (DummyIndp X TQ) are added.
[ExRem.sub.it] = [DummyIndp.sub.it] + DummyIndp X RO[A.sub.it] +
DummyIndp X T[Q.sub.it] + control variables + timedummies+
[[epsilon].sub.it].... (2)
In Model III, interaction terms of fully independent remuneration
committee with promoters' shareholding (DummyIndp X PSH) and
ownership concentration (DummyIndp X OQ are added to model I.
[ExRem.sub.it] = [DummyIndp.sub.it] + DummyIndp X PS[H.sub.it] +
DummyIndp X O[C.sub.it] + control variables + timedummies+
[[epsilon].sub.it].... (3)
In Model IV, interaction terms of fully independent remuneration
committee with company's accounting performance (DummyIndp X ROA),
company's market performance CDummyIndp X TQ), promoters'
shareholding (DummyIndp XPSH), and ownership concentration (DummyIndp X
OC) are added to model I. The purpose of this model is to examine the
impact of the presence of fully independent remuneration committees on
the sensitivity of executive remuneration to the accounting performance,
market performance, promoters' shareholding, and ownership
concentration.
[ExRem.sub.it] = [DummyIndp.sub.it] + DummyIndp X RO[A.sub.it] +
DummyIndp X T[Q.sub.it] + DummyIndp X PS[H.sub.it] + DummyIndp X
O[C.sub.it] +control variables + timedummies+ [[epsilon].sub.it].... (4)
In Model V, the impact of the presence of independent chairman of
remuneration committee (IndpChair) on executive remuneration is
explored.
[ExRem.sub.it] = [IndpChair.sub.it] + control variables +
timedummies+ [[epsilon].sub.it].... (5)
In Model VI, the interaction terms of the presence of independent
chairman of remuneration committee with company's accounting
performance (IndpChair X ROA) and company's market performance
(IndpChair X TQ) are added to model V.
[ExRem.sub.it] = [IndpChair.sub.it] + IndpChair X RO[A.sub.it] +
IndpChair X T[Q.sub.it] + control variables + timedummies +
[[epsilon].sub.it].... (6)
In Model VII, the interaction terms of the presence of independent
chairman of remuneration committee with promoters' shareholding
(IndpChair X PSH) and ownership concentration (IndpChair X OC) are added
to model V.
[ExRem.sub.it] = [IndpChair.sub.it] + IndpChair X [PSH.sub.it] +
IndpChair X O[C.sub.it] + control variables + timedummies+
[[epsilon].sub.it].... (7)
In Model VIII, the interaction terms of the presence of independent
chairman of remuneration committee with company's accounting
performance (IndpChair X ROA), company's market performance
(IndpChair X TQ), promoters' shareholding (IndpChair X PSH), and
ownership concentration (IndpChair X OC) are added to model V.
[ExRem.sub.it] = [IndpChair.sub.it] + IndpChair X [ROA.sub.it] (+
IndpChair XT[Q.sub.it] + IndpChair X [PSH.sub.it] + IndpChair X
O[C.sub.it] +control variables + timedummies + [[epsilon].sub.it]....
(8)
Data Analysis & Findings
As reported in Table 2, average per capita executive remuneration
is INR 6.50 million. Mean lagged return on assets (ROA) is 0.11 and the
mean Tobin's Q is 1.29, which indicates that on an average, a
company's market value of debt and equity is 1.29 times its total
assets. The average board size is 10 directors and the average
remuneration committee size is 3 directors. The average institutional
shareholding is 20 per cent and the mean proportion of promoters'
shareholding is 49 per cent. The average proportion of shareholding held
by 5 largest shareholders is 50 per cent. The average size of companies
in terms of total assets is INR 66964.41 million. The mean leverage
ratio is 0.30 which implies that on an average, total debt of a company
is 0.30 times its total assets. The mean growth rate represented by the
market-to-book ratio is 73.91, which reveals that the market value of
equity of sampled companies is 73.91 times the book value of equity. The
average stock return volatility of 3.24 shows that daily returns deviate
3.24 per cent from the mean returns. 60per cent of the company-years
observations had the presence of fully independent remuneration
committees on their boards. 87 per cent of company-year observations
have the presence of independent director as a chairman of remuneration
committee, which reveals that 27 percent company-year observations have
the presence of independent directors as chairmen of remuneration
committee but all other members of the committee may not be independent.
Pearson correlation matrix reported in Table 3 suggests that
executive remuneration is significantly correlated with most of the
independent variables. Correlation coefficients of all pairs of
variables are less than 0.8, pointing out that multi-collinearity should
not be a problem in this study. Executive remuneration is positively
correlated with lagged return on assets, board size, institutional
shareholding, total assets, and growth opportunities. .However,
remuneration committee size, promoters' shareholding, ownership
concentration, company leverage, and stock return volatility are
negatively correlated with the executive remuneration.
Preliminary analysis of the data shows the presence of heterosce
dasticity (1), autocorrelation (2) and cross-sec tional dependence (3).
Hoechle (2007) suggested Driscoll-Kraay standard error estimates which
are robust to heteroscedasticity, autocorrelation and cross sectional
dependence. Thus, two-way fixed-effects regression is applied with
Driscoll-Kraay standard errors to examine the impact of independence of
remuneration committee on the executive directors' remuneration.
Fully Independent Remuneration Committee & Executive
Remuneration
Independence of remuneration committee is represented by a dummy
variable which takes the value one if all its members are independent
directors and zero otherwise. Table 4 shows the relationship between
fully independent remuneration committee and executive remuneration.
In Table 4, model I reveals that the dummy variable representing
the presence of fully independent remuneration committees has been found
influencing the executive remuneration positively and significantly.
This finding is in line with Sapp (2008) and goes contradictory with
Anderson and Bizjak (2003). This result rejects hypothesis 1 which
stated that remuneration committee independence is negatively related to
executive remuneration. Model II includes two interaction terms; fully
independent remuneration committees with company's accounting
performance and company's market performance. The results reveal if
remuneration committee is fully independent, the accounting performance
is found to have a negative impact on executive remuneration, whereas
increase in Tobin's Q is found to increase the executive
remuneration in the presence of fully independent remuneration
committees. Model III includes two separate interaction terms i.e. fully
independent remuneration committees with promoters' shareholding
and ownership concentration. Promoters' shareholding and ownership
concentration do not play any role in fixation of remuneration of
executive directors in the presence of fully independent remuneration
committee. Model IV includes all interaction terms and reveals the same
results as disclosed in models II and III. Thus, hypotheses 3a and 3b
are accepted. Hypotheses 4a and 5a have been rejected. Control
variables, such as ROA and total assets are found to be positively and
significantly related with the executive remuneration. Tobin's Q,
board size, ownership concentration, and leverage are negatively and
significantly related to the executive remuneration. Remuneration
committee size, institutional shareholding, promoters'
shareholding, growth, and stock return volatility are not found to play
significant role in determining the remuneration of executive directors.
Independent Chairman of Remuneration Committee & Executive
Remuneration
Independence of remuneration committee is represented by a dummy
variable which takes the value one if the chairman of remuneration
committee is an independent director and zero otherwise. Table 5 shows
the results regarding the relationship between the presence of an
independent remuneration committee chairman and executive remuneration.
In Table 5, model V reveals that the dummy variable representing an
independent chairman of remuneration committee is found to be positively
and significantly associated with the executive remuneration. Hypothesis
2 is rejected which stated that remuneration committee independence is
negatively related to executive remuneration. It implies that companies
having independent director as the chairman of the remuneration
committee grant higher remuneration to its executive directors as
compared to companies having non-independent directors as the chairmen.
This model accounts for 67.40 percent change in executive remuneration.
In model VI, two interaction terms of the presence of an
independent committee chairman with company's accounting
performance and company's market performance are included. Market
performance has been found to be positively related to executive
remuneration when independent director is the chairman of the
remuneration committee. Model VII includes two interaction terms of the
presence of an independent committee chairman with promoters'
shareholding and ownership concentration. Promoters' shareholding
and ownership concentration are not found to play any significant role
in fixation of remuneration of executive directors in the presence of an
independent committee chairman.
Model VIII includes four interaction terms; the presence of an
independent committee chairman with company's accounting
performance, company's market performance, promoters' share
holding and ownership concentration. Same results are revealed in model
VIII as are in models VI and VII, except the interaction term of
independent committee chairman and promoters' shareholding became
significant in the last model. It implies that an increase in
promoters' shareholding leads to decreased executive remuneration
in the presence of an independent committee chairman. This model
explains 68.83 percent of variation in the executive remuneration. Thus,
hypotheses 3c, 3d, 4b are accepted and hypothesis 5b has been rejected.
Discussion & Conclusion
The increasing executive remuneration even when fully independent
remuneration committee and independent committee chairman exist, is an
empirical evidence to the fact that the remuneration committees have
failed to monitor the executive remuneration in India. It supports the
arguments of Bhattacharyya (2014) who stated that the general perception
is that the independent directors in India have failed in monitoring the
executive management. One reason might be weak regulatory institutions.
But the more important reason is that in Indian business environment,
where the issue is principal-principal conflict and not a typical
principal-agent conflict, it is too much to expect effective monitoring
by independent directors. In India, concentration of ownership is a norm
rather than an exception. Public sector enterprises, family businesses
and group companies dominate the corporate sector. The dominant
shareholder, who enjoys significant power, manages the company through
its nominee managers. The dominant shareholders expect the board to take
into consideration issues in family governance and the policy of the
business group. Therefore, companies adopt strategies, which not
necessarily aim to maximize firm value (Bhattacharyya, 2014).
Another aspect highlighted by Ingovem (2016) that needs to be
checked is whether the independent directors in reality are independent
or not. It has been reported that several top companies are found to be
having a pecuniary relationship with their independent directors. The
S&P BSE 200 Index, a collection of the top 200 companies on the
bourse by market capitalization, contains 21 companies that have had
such a relationship with their 25 independent directors. Of these, six
companies from the Nifty 50 Index and four from Nifty Next 50 Index have
had such a relationship. The similar relationships have been found in 34
smaller companies outside the BSE 200 index. Such relationships severely
violate the independence of the independent directors (Subramanian,
2016).
The executive remuneration has been found negatively associated
with accounting performance, but positively with market performance in
those companies having fully independent remuneration committees. The
findings also indicate that promoters' shareholding and ownership
concentration are not playing any role in fixation of executive
remuneration in these companies. The executive remuneration has been
found positively and significantly associated with independence of
remuneration committees, the combination of these findings points toward
the tacit role the promoters and dominant shareholders seem to be
playing to get the executive remuneration linked with market performance
of the company through remuneration committees. It is generally accepted
that the primary concern of the promoters and dominant shareholders is
appreciation of their stock. Linking executive remuneration to market
performance of the company by the remuneration committees will inflate
the remuneration package further.
It is interesting to note that executive remuneration has been
found associated negatively with accounting performance of companies. An
independent remuneration committee acknowledges the perception that
remunerating directors on the basis of accounting performance may
encourage them to ignore projects with large net present values in favor
of projects generating immediate accounting profits (Jensen &
Murphy, 1990). Moreover, accounting performance measures are easier to
manipulate. Thus, in order to discourage the use of accounting
performance measures, an independent remuneration committee considers
accounting performance to be negatively linked with executive
remuneration. Promoters' shareholding is negatively related to
executive remuneration in the presence of an independent committee
chairman. This finding refutes the 'rent extraction theory' in
the presence of independent director as the chairman of remuneration
committee and implies that promoters are not able to increase executive
remuneration for themselves as well as for other executive directors
when remuneration committee is headed by an independent director.
The findings of the present study suggest that the institution of
independent directors and committees is in reality not independent and
have failed to check unexplainable increase in executive remuneration.
The new regulatory provisions are expected to improve corporate
governance in India including the independence of directors and
committees but it needs resources and commitment of the regulatory
bodies to ensure compliance. In order to assess the effectiveness of new
regulatory provisions and their implementation, more research studies
need to be planned in future.
Lakwinder Singh Kang (E-mail:lakhwinder_gndu@yahoo.com) Is
Professor & Payal (E-Mail: Payal.asr@gmail.com) is Research Fellow,
Department of Commerce, Guru Nanak Dev University, Amritsar, Punjab.
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(1) Heteroscedasticity is checked by employing likelihood-ratio
test which compares the results of iterated generalized least squares
considering heteroscedasticity with the results of generalized least
squares without heteroscedasticity. A significant p value for the chi
square statistic of likelihood-ratio test confirms the presence of
heteroscedasticity in the data.
(2) A Wooldridge test for serial correlation in the panel data is
applied to test the null hypothesis that there is no serial correlation
and if serial correlation is found, then clustering at the panel level
would produce consistent estimates of the standard errors (Drukker,
2003). A significant p value rejects the null hypothesis of no
autocorrelation.
(3) Cross sectional dependence is checked with Pesaran's test
as suggested by Hoyos and Sarafidis (2006). This tests the null
hypothesis of cross-sectional independence. A significant p value of
this test strongly rejects the null hypothesis of no cross sectional
dependence.
Table 1 Empirical Literature
Study Sample and Time-period Dependent variable
Country
Conyon & 94 UK 1991-94 Compensation of
Peck (1998) companies highest paid
director
Daily et al. 194 US 1991-94 Contingent
(1998) companies compensation,
Non-contingent
compensation, Total
compensation, and
Yearly change in
compensation
Newman and 161 US 1991-92 CEO compensation,
Mozes (1999) firms Change in CEO
compensation
Anderson & 1376 US 1985-98 CEO compensation
Bizjak (2003) company--year
observations
Vafeas (2003) 271 US firms 1991-97 CEO compensation
Sapp (2008) 416 Canadian 2000-05 CEO compensation
public listed
companies
Sun & Cahan 812 US firms 2001 CEO compensation
(2009)
Sun et al. 474 firms 2001 Future operating
(2009) tee in US income of companies
Gregory-Smith FTSE350 1996-2008 CEO pay
(2012) companies UK
Study Remuneration Result
committee measures
Conyon & 1.Absence or presence Absence or presence of
Peck (1998) of remuneration remuneration committee
committee insignifi-non-executives
2,Proportion of positively cant whereas
non-executives on proportion of related
remuneration committee with compensation.
Daily et al. 1.Proportion of No significant impact
(1998) affiliated directors of committee
2.Proportion of composition on
interdependent CEO compensation
directors
3.Proportion of CEOs
serving on the
compensation committee
Newman and 1.Insider-dominated Insignificant impact of
Mozes (1999) firm committee composition
2.Percentage of on CEO compensation
insiders on
compensation committee
Anderson & 1.Compensation No significant impact
Bizjak (2003) committee independence of committee
independence
Vafeas (2003) 1 .Presence of insiders Insignificant impact of
on compensation committee composition
committee and committee
2.Committee composition/ composition/performance
performance interactive interactive term
term
Sapp (2008) 1.Proportion of Positively related
independent members on with CEO compensation
compensation committee
Sun & Cahan Compensation committee High compensation
(2009) quality represented by committee governance
CEO appointed directors, quality leads to more
senior directors, positive association
CEO directors, director between CEO cash
shareholdings, compensation and firms'
additional accounting earnings
directorships, and
committee size.
Sun et al. Compensation committee CEO stock option grants
(2009) tee quality for companies with high
commit-quality results
into higher future
operating income.
Gregory-Smith 1. Committee size Insignificant impact of
(2012) 2. Proportion of committee size and the
insiders on committee proportion of insiders
Table 2 Descriptive Statistics
Variable Mean Std. Dev. Minimum
ExRem 6.50 10.35 0.08
ROA 0.11 0.08 -0.08
TQ 1.29 0.98 0.21
Bsize 9.99 2.23 4.00
RemCom Size 3.25 0.66 1.00
ISH 0.20 0.14 0.00
PSH 0.49 0.18 0.00
OC 0.50 0.15 0.16
TA 66964.41 2.6e+05 286.70
Lev 0.30 0.18 0.00
Grow 73.91 111.35 0.30
SRV 3.24 1.16 0.61
DummyIndp 0.60
IndpChair 0.87
Variable Median Maximum
ExRem 2.69 76.47
ROA 0.10 0.71
TQ 0.98 6.59
Bsize 10.00 16.00
RemCom Size 3.00 6.00
ISH 0.19 0.55
PSH 0.51 0.96
OC 0.49 0.93
TA 16648.80 3.0e+06
Lev 0.31 0.84
Grow 37.61 1027.36
SRV 3.14 12.39
DummyIndp
IndpChair
Note: ExRem = natural logarithm of the average remuneration
paid to executive directors; ROA = Return on Assets; TQ = Tobin's
Q; BSize = Number of directors on the board; RemCom Size = Number
of directors on the remuneration committee; ISH = Institutional
shareholding; PSH = Promoters' shareholding; OC = Percentage of
shares owned by five largest shareholders; TA = Total Assets;
Lev = Leverage; Grow = Growth opportunities represented
through market-to-book ratio
Table 3 Pearson Correlation
ExRem Lagroa Tqpy BSize
ExRem 1.000
Lagroa 0.321 *** 1.000
Tqpy 0.233 0.461 *** 1.000
Board 0.202 *** 0.193 *** 0.134 ** 1.000
size
Rem -0.013 -0.166 *** -0.027 0.1 19 **
Com
Size
ISH 0.408 *** 0.107 * 0.103 * 0.237 ***
PSH -0.092 * 0.097 * 0.210 *** 0.091 *
OC -0.192 *** 0.072 0.211 *** 0.039
TA 0.586 *** 0.075 (^) 0.100 * 0.328 ***
Lev -0.146 *** -0.315 *** 0.260 *** -0.006
Grow 0.436 *** 0.374 *** 0.518 *** 0.218 ***
SRV -0.381 *** -0.160 *** 0.190 *** -0.160 ***
Rem ISH PSH OC
Com Size
ExRem
Lagroa
Tqpy
Board
size
Rem 1.000
Com
Size
ISH 0.006 1.000
PSH -0.049 -0.350 *** 1.000
OC -0.020 -0.241 *** 0.634 *** 1.000
TA 0.131 ** 0.602 *** -0.082 (^) -0.198 ***
Lev 0.074 (^) -0.210 *** 0.104 * -0.143 **
Grow -0.026 0.204 *** 0.165 *** 0.112 *
SRV -0.014 -0.252 *** 0.055 0.056
TA Lev Grow SRV
ExRem
Lagroa
Tqpy
Board
size
Rem
Com
Size
ISH
PSH
OC
TA 1.000
Lev 0.064 1.000
Grow 0.254 *** -0.202 *** 1.000
SRV -0.353 *** 0.079 (^) -0.234 *** 1.000
(^) p less than .10, * p less than .05,
** p less than .01, *** p less than .001.
Table 4 Independence of Remuneration Committee &
Executive Remuneration (N = 510 Company-Year Observations)
Variable Model I Model II
R-Squared 0.6674 0.6727
F-value 485.80 *** 72.25 ***
Remuneration Committee Independence
DummyIndp .194(.057) ** .206(.064) *
Interactions with independent RemCom
DummyIndp X ROA -.121(.044) *
DummyIndp X TQ .182(.022) ***
DummyIndp X PSH
DummyIndp X OC
Company Performance
ROA 2.278(.280) *** .257(.033) ***
TQ -.065(.033) (^) -.178(.032) ***
Board Characteristics
B size -.068(.023) * -.074(.024) *
RemCom Size .0002(.037) .016(.035)
Ownership Structure
ISH -.089(.264) .025(.271)
PSH .242(.295) .041 (.047)
OC -.5800372) -.047(.035)
Other Company Characteristics
TA .268(.083) .277(.077) **
Lev -1.271(.226) *** -1.350(.219)*** -1
Grow .0007(.0003) (^) .0006(.0003) (^)
SRV -.030(.027) -.036(.026)
Constant -1.313(1.010) -1.369(.812)
Time dummies Yes Yes
Variable Model III Model IV
R-Squared 0.6674 0.6737
F-value 387.35 *** 97.36 ***
Remuneration Committee Independence
DummyIndp .192(.052) ** .201(.058) **
Interactions with independent RemCom
DummyIndp X ROA -.131(.041) *
DummyIndp X TQ .187(.020) ***
DummyIndp X PSH -.085(.066) -.1160064)
DummyIndp X OC .070(.055) .0750058)
Company Performance
ROA .180(.022) .267(.032) ***
TQ -.064(.033) (^) -.180(.0300 ***
Board Characteristics
B size -.068(.024) * -.072(.024) *
RemCom Size -.003(.034) .014(.034)
Ownership Structure
ISH -.065(.261) .0180269)
PSH .091(.093) .1200089)
OC -.093(.041) * -.080(.040) (^)
Other Company Characteristics
TA .259(.082) * .267(.079) **
Lev .266(.224)*** -1.368(.234) ***
Grow .0007(.0003) (^) .0006(.0003)
SRV -.036(.026) -.043(.024)
Constant -1.212(.914) -1.258(834)
Time dummies Yes Yes
*** significant at .001, ** significant-at .01, * significant
at .05, (^) significant at .10 Figures in brackets are the standard
errors.
Table 5 Independence of Remuneration Committee &Executive
Remuneration (N = 510 Company-Year Observations)
Variable Model V Model VI
R-Squared 0.6740 0.6832
F-value 1057.75 *** 246.10 ***
Remuneration Committee Independence
IndpChair .524(.108) ** .345(.149) *
Interactions with independent Chairman of RemCom
IndpChair X ROA -.555(.121) **
IndpChair X TQ .225(.097) *
IndpChair X PSH
IndpChair X OC
Company Performance
ROA 2.177(.245) .686(.133) **
TQ -.052(.032) -.245(.082) *
Board Characteristics
BSize -.069(.025) * -.078(.025) *
RemCom Size -.024(.035) -.015(.035)
Ownership Structure
ISH .05 8(.286) .1200282)
PSH .131(.189) .277(.200)
OC -.457(.346) -.416(.344)
Other Company Characteristics
TA .256(.083) * .273(.076) **
Lev -1.174(.219) *** -1.171(.228) **
Grow .0007(.0004) (^) .0006(.0003)
SRV -.021 (.028) -.042(.028)
Constant -1.512(1.078) -1.289(.998)
Time dummies Yes Yes
Variable Model VII Model VIII
R-Squared 0.6767 0.6883
F-value 542.41 *** 457.45 ***
Remuneration Committee Independence
IndpChair .484(.100) ** .278(.126) (^)
Interactions with independent Chairman of RemCom
IndpChair X ROA -.611(.153) **
IndpChair X TQ .285(.105) *
IndpChair X PSH -.210(.124) -.277(.121) *
IndpChair X OC -.018(.lll) -.035(.132)
Company Performance
ROA 2.290(.233) *** .747(.164) **
TQ -.060(.031) (^) -.309(.089) **
Board Characteristics
BSize -.069(.026) * -.078(.026) *
RemCom Size -.035(.033) -.028(.034)
Ownership Structure
ISH -.030(.301) -.014(.307)
PSH .1740106) .2540103) *
OC -.012(.089) .008(.104)
Other Company Characteristics
TA .290(.094) * .326(.081) **
Lev -1.1980204) *** -1.215(.221) ***
Grow .000700004) .0006(.0003)
SRV -.0150028) -.038(.028)
Constant -1.906(1.038) -1.688(.899) (^)
Time dummies Yes Yes
*** significant at .001, ** significant at .01, * significant
at .05, A significant at .10. Figures in brackets are the
standard errors.
