Abstract
The wave of the recent financial crisis has reawakened interest in corporate governance as well as the relationship between executive compensation and corporate performance. Notably, corporate governance has been presented as a mechanism to absorb fiscal crisis faced in emerging economies. The principal aim of this study is to investigate the relationship between CEO compensation and corporate performance among commercial banks operating in a small emerging market, namely Jordan. Primary data were collected for a sample of 13 Jordanian commercial banks listed at Amman Stock Exchange (ASE) during the period of 2010 -2016. The findings of this paper suggest that corporate performance measured by return on equity (ROE) and return on assets (ROA) has no influence on CEO compensation. Furthermore, this paper examines the impact of a firm’s size on the relationship between CEO compensation and corporate performance. The results reveal a significant relationship between executive compensation and firm’s performance among the smaller sample firms.
Highlights
Executive compensation has been recognized as an important internal corporate governance mechanism over the last two decades
The findings of this paper suggest that corporate performance measured by return on equity (ROE) and return on assets (ROA) has no influence on CEO compensation
The findings document that firms with a higher blockholders ownership pay higher CEO compensation. This result is in the line with the result of Abed et al (2014) at which they document that large shareholders do not perform an effective monitoring role in Jordanian commercial banks
Summary
Executive compensation has been recognized as an important internal corporate governance mechanism over the last two decades. Ownership of firms in developing markets is highly concentrated compared to the developed markets. We expect that the agency problem is much higher in developed markets, as a result, it is important to pay more attention to the level of CEO compensation and link it to the corporate performance. A vast body of literature has found that one of the solutions to agency problem is to employ effective compensation plans in emerging markets (Gallego & Larrain 2012; Lam et al, 2013; Raithatha & Komera 2016; Zou et al, 2015). Scholars argue that the effectiveness of commonly used compensation plans such as cash bonuses and stock options may not be linked to the corporate performance in emerging corporate governance settings (Ghosh, 2006; Luo & Jackson, 2012)
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