Abstract
The object of this research focuses on executive compensation, which is a form of appreciation for the agent’s contribution as the party responsible for the company performance and the improvement of the walfare of the principals. The aims of this study is to determine the effect of profitability and leverage on executive compensation in non financial companies listed in Indonesia Stock Exchange for the period 2017 – 2019. Population of this study is non financial companies listed in Indonesia Stock Exchange for the period 2017 – 2019 with a sample by non financial listed in Kompas100 index to represent the existing population. Independent variables used in this study are profitability which is measured by return on assets (ROA) and leverage which is measured by debt to equity ratio (DER). Dependent variable used in this study is executive compensation which is measured by total remuneration of president director. This study also used control variables such as executive age, executive gender and executive tenure. The sampling method of this study is a purposive sampling. The research model used is panel data with fixed effect model approach. The findings have shown that profitability has a negative significant effect on executive compensation. It is also noted that the lower level of the company’s debt, the larger the amount of executive compensation. These findings shed the light on research on agency theory that compensation on performance is not valid in Indonesia.
Highlights
In the last decade, the issue of executive compensation has been widely debated in various perspectives
The findings have shown that profitability has a negative significant effect on executive compensation
It is noted that the lower level of the company’s debt, the larger the amount of executive compensation. These findings shed the light on research on agency theory that compensation on performance is not valid in Indonesia
Summary
The issue of executive compensation has been widely debated in various perspectives. Friana (2019) stated in Indonesia as the Minister of Transportation and the Minister of BUMN stated that the odd remuneration that had occurred in several institution in the last three years was due to policies of remuneration that were not based on company performance and were not in accordance with the regulation of Financial Service Authority No 45 of 2015, such as the compensation scandal commited by president director and a number of his subordinates in the midst of company’s condition which lost billion rupiah and several other cases such as the remuneration received by director which in reality the company suffered a net loss of hundreds million rupiah (Arief, 2019) Another case is reforms in China that raises executive compensation issue and examine the determinants of executive compencastion (Conyon et al, 2015; Firth et al, 2016; Ullah et al, 2020). The issue of compensation received considerable attention as a form of emphasis on company performance which indicates the company’s success, ability to generate long–term benefit, as well as to excel in global competition
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