Effectiveness, Efficiency and Executive Directors’ Compensation Among Listed Companies in Malaysia

Ali Saleh Ahmed Alarussi

doi:10.1177/21582440211054129

Abstract

This paper examines whether or not there is any relationship between executive directors’ compensation and the effectiveness and efficiency ratios of non-financial companies in Malaysia. Two variables are used in this study as independent variables (IVs), that is, company effectiveness ratio (return on equity) and company efficiency ratio (asset turnover); and six control variables, that is, firm visibility, liquidity, profitability, working capital, firm net-worth, and leverage. The executive directors’ compensation is the dependent variable (DV). Data are collected from 360 observations (120 companies’ annual reports for 3 years). STATA software analysis is used to examine the collected data. The results show that company effectiveness is one of the determinants of executive directors’ compensation but not company efficiency. Firm visibility, firm net-worth, and profitability also have strong relationships with executive directors’ compensation. However, liquidity and leverage do not show any significant relationship with executive directors’ compensation in Malaysian listed companies. This study focuses on Malaysia during the period of 2012 to 2014 because Malaysia is one of the developing countries in Asia, and in 2010, the Malaysian economy exhibited strong signs of recovery from the global financial crisis. However, the period between 2012 and 2014 was a critical period for the Malaysian economy; the Ringgit experienced depreciation and was devalued by more than 40%, which negatively affected the Malaysian economy as a whole. In addition, this study examines new variables in the Malaysian context, that is, firm efficiency, firm visibility, and firm net-worth.

Highlights

Of late, the continuous rise in the compensation of executive directors has become a matter of concern for the shareholders and the stakeholders
It has been found that there is a negative relationship between salary base and earnings management (Nelson & Rahim, 2018; Xu & Chang, 2017); this study hopes to obtain more robust results without using earnings management practices; third, this study examines new variables in the Malaysian context, that is, firm visibility, firm effectiveness and firm net-worth; and fourth, the study focuses on the period of devaluation of the Malaysian currency
This study examines whether or not there is a relationship between company effectiveness and directors’ compensation

Summary

Introduction

The continuous rise in the compensation of executive directors has become a matter of concern for the shareholders and the stakeholders. The current study differs from previous studies in a number of aspects: first, this study sheds light on the executive directors’ compensation and its relationship with the effectiveness and efficiency of the companies’ operations, by using financial analysis ratios This issue is very significant in helping stakeholders and other related parties, creditors, investors, management and shareholders, in their decision-making process; second, this study uses the salary base (cash remuneration) to measure executive directors’ compensation, similar to Adut et al (2003), Leone et al (2006), and others.

Literature Review

Findings

Discussion of Results