Article2012

Performance Sensitivity of Executive Pay: The Role of Foreign Investors and Affiliated Directors in J apan

70 citations0/0 files storedCorporate Governance An International Review

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Corporate Finance and Governance Auditing, Earnings Management, Governance Corporate Governance and Financial Management

Abstract

Abstract Manuscript Type Empirical Research Question/Issue This study investigates the effects of corporate governance factors on the firm performance and executive compensation linkage. Specifically, we examine how domestic corporate‐appointed directors, bank‐appointed directors and foreign ownership moderate the relationship between firm profitability, sales growth, and executive bonus pay in Japanese firms. Research Findings/Insights Using a sample of the largest Japanese manufacturing companies from 1997 to 2007, we find that corporate‐appointed directors positively moderate the relationship between firm growth and bonus pay, while foreign shareholders exhibit a positive moderating effect on the relationship between firm profitability and bonus pay. Bank‐appointed directors are straddled between their profitability orientation and relational role: They link firm profitability and bonus pay, but also show positive influence on the firm growth and bonus pay relationship. Theoretical/Academic Implications This study makes a contribution to research on ownership heterogeneity and executive compensation by empirically showing that different owners and directors affiliated with certain ownership groups have varied implications on the firm performance–executive pay relationship. It also makes a contribution to research on corporate governance change by providing insights on how different actors facilitate shifts in the linkage between performance and pay. Practitioner/Policy Implications Our findings offer insights to stakeholders to pay attention to ownership structure and board composition in acknowledging the varied financial motivation of executives to pursue growth and/or profitability.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1990Performance Pay and Top-Management Incentives 2003Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives 1998Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure 1998Meta-analytic reviews of board composition, leadership structure, and financial performance 2003Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives 2003Institutional Investors and Executive Compensation 2003The Cross-National Diversity of Corporate Governance: Dimensions and Determinants

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2018Ownership structure and firm performance of listed tourism firms 2018Performance sensitivity of executive pay: the role of ownership structure, board leadership structure and board characteristics 2015Leveraging foreign institutional logic in the adoption of stock option pay among J apanese firms 2019Female directorship on boards and corporate sustainability policies: Their effect on sustainable development

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