Abstract
This study first investigates the effect of firm performance on executive pay in listed firms in Turkey, an emerging market from 2009 to 2013. The results reveal a positive and significant link between firm profitability and executive pay: executive pay is sensitive to performance. The question of whether internal corporate control mechanisms play a significant role in the association between executive pay and firm profitability is revisited. Executive pay is weakly tied to profitability when the ownership concentration is high. We expected that, following the managerial power propositions, leadership duality and board size will weaken performance sensitivity of executive pay, with the impact of board independence on this sensitivity being the opposite. However, it was found that only board leadership duality and board size negatively affect the association between return on equity and executive compensation. This study concludes that the performance sensitivity of pay is weaker when executives have more control over decisions, especially those related to their compensation, and when the board of directors’ monitoring effectiveness is relatively low.
Highlights
Executive pay is a critical corporate governance mechanism that monitors, disciplines and motivates the executives of firms
The results show that the firm performance–executive pay relationship is weaker in the presence of larger boards and leadership duality
We found that, as firms’ leadership duality and board size increase, firms prefer executive pay systems that are more dependent on firm performance
Summary
Executive pay is a critical corporate governance mechanism that monitors, disciplines and motivates the executives of firms. Managerial power theory (Bebchuk & Fried, 2004), on the other hand, reflects these criticisms and asserts that Chief executive officers (C.E.O.s) and top managers might exercise significant bargaining power over their board, which leads to compensation contracts that are not in the best interests of stockholders This view suggests that top executives of firms may extract economic rents when corporate governance is weak and the executives, or C.E.O.s, are highly powerful vis-à-vis the board. This is due to the differences in the nature and extent of governance issues and dissimilarities in corporate ownership structures, market dynamics and institutional environments (Armitage, Hou, Sarkar, & Talaulicar, 2017). Volatile and unreliable financial and capital markets, insufficient liquidity to provide external control and weak legal protection for minority shareholders shapes the external corporate governance environment in Turkey (Nilsson, 2007; Oba, Tiğrel, & Şener, 2014; Yamak & Ertuna, 2017)
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