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Determination of Executive Compensation in an Emerging Economy. Evidence from India

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  • Arijit Ghosh

Abstract

Most studies of the determination of executive compensation are based on the experience of developed countries, and mainly focus on Chief Executive Officer (CEO) compensation. Determination of board compensation is relatively ignored in the literature. This paper examines the effect of corporate governance, firm performance, and corporate diversification on the board, as well as CEO compensation and its components, in the context of an emerging economy-India-where a managerial market has yet to develop. Data for 462 firms for 1997-2002 in the Indian manufacturing sector have been used. This paper finds that board compensation largely depends on current- and past-year performance and diversification of the firm, whereas CEO compensation depends on current-year firm performance only. Among the personal attributes of the CEO, only in-firm experience has significant influence on CEO compensation. This finding contradicts the existing studies, where current- and past-year firm performance, as well as age, experience, and education of the CEO are important factors in determining CEO compensation.

Suggested Citation

  • Arijit Ghosh, 2006. "Determination of Executive Compensation in an Emerging Economy. Evidence from India," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 42(3), pages 66-90, May.
  • Handle: RePEc:mes:emfitr:v:42:y:2006:i:3:p:66-90
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    References listed on IDEAS

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    1. Nancy L. Rose & Andrea Shepard, 1997. "Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 489-514, Autumn.
    2. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-349, June.
    3. Mark R. Huson, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
    4. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    5. Saha, Bibhas & Sarkar, Subrata, 1999. "Schooling, Informal Experience, and Formal Sector Earnings: A Study of Indian Workers," Review of Development Economics, Wiley Blackwell, vol. 3(2), pages 187-199, June.
    6. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1995. "The CEO, the Board of Directors and Executive Compensation: Economic and Psychological Perspectives," Industrial and Corporate Change, Oxford University Press, vol. 4(2), pages 293-332.
    7. Palia, Darius, 2001. "The Endogeneity of Managerial Compensation in Firm Valuation: A Solution," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 735-764.
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    Cited by:

    1. repec:eee:advacc:v:35:y:2016:i:c:p:159-169 is not listed on IDEAS
    2. Chia-Ying Chan & Vivian W. Tai & Kuo-An Li & Ranko Jelic, 2012. "Do Market Participants Favor Employee Stock Option Schemes? Evidence from Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 110-132, January.
    3. repec:eee:jocaae:v:12:y:2016:i:2:p:159-175 is not listed on IDEAS
    4. Luo, Yongli, 2015. "CEO power, ownership structure and pay performance in Chinese banking," Journal of Economics and Business, Elsevier, vol. 82(C), pages 3-16.
    5. Ghosh, Saibal, 2010. "Firm performance and CEO pay: Evidence from Indian manufacturing," MPRA Paper 25451, University Library of Munich, Germany.
    6. Sonja Fagernäs, 2006. "How do family ties, boards and regulation affect pay at the top? Evidence for Indian CEOs," Working Papers wp335, Centre for Business Research, University of Cambridge.
    7. repec:eee:iburev:v:27:y:2018:i:2:p:465-480 is not listed on IDEAS
    8. Chia-Ying Chan & Vivian W. Tai & Kuo-An Li & Ranko Jelic, 2012. "Do Market Participants Favor Employee Stock Option Schemes? Evidence from Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 110-132, January.

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