Performance sensitivity of executive pay: the role of ownership structure, board leadership structure and board characteristics

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.

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