Executive compensation and risk: An empirical study in Indonesia

Abstract

This study investigates the relationship between executive compensation and risk for banks in Indonesia over the period 2010–2013, with 374 observations. The risk of banks was measured by non-performing loans that implicated loan risk. Non-performing loans were the dependent variable and executive compensation was the independent variable. Firm size, firm age, and capital asset ratio were the control variables. The result of the study indicated that executive compensation, firm age, and capital asset ratio had a negative effect on risk and firm size had a positive effect on risk. This chapter investigates the relationship between executive compensation and risk for banks in Indonesia over the period 2010–2013, with 374 observations. The banking institution is a financial institution that acts as an intermediary between excess funds and those who need funds. In a banking institution, the achievement of management can be shown through the way management anticipates business risks. Bank owners reward executives in the form of a compensation which has shown an increase. Credit risk is one of the risks faced by a bank. It is the non-payment of loans that have been given to debtors. According to, credit risk is a risk due to failure or inability of customers to re-turn the loan amount received from the bank and its interest within the specified time period. A higher Capital Adequacy Ratio value of bank shows a better capital position of the bank, because it has sufficient capital to anticipate potential losses caused by operational activities.