CEO Compensation and Cronyism in Emerging Economies: Evidence from India

Abstract

This study investigates the cronyism evidence in Indian listed firms and examines if excessive CEO and directors compensation reflect pay reciprocity impacting firm performance. Further the impact of CEO’s ties with the controlling owner on excess compensation, pay reciprocity and cronyism is also examined. OLS fixed effects regression on NSE 500 firms during 2002–2020 has been used for investigating the evidence of cronyism and the impact of CEOs’ ties with the controlling owner on cronyism. Based on the analysis it is observed that CEO compensation is strongly linked to CEO characteristics and corporate governance in addition to economic determinants. Consistent with reciprocity norms, we report a positive relationship between excess CEO compensation and excess director compensation, especially in firms where the CEO has ties to the controlling owner. However, pay reciprocity does benefit shareholders by improving subsequent firm value. Our findings indicate that excess CEO compensation increases subsequent firm value, especially in firms where the CEO has ties to the controlling owner.