Determinants of CEO compensation: evidence from India

Abstract

Despite a wealth of research on CEO compensation drawn from agency and managerialist perspectives, little is known about determinants of compensation in contexts outside developed economies and professionally-run organizations. The Indian context provides a suitable setting for exploring CEO compensation due to several factors: being in a transition stage, role of government as a stakeholder through institutional investors, and role of banks (Ramaswamy, Li, Veliyath, 2002). Further researchers (Khanna and Palepu, 2000) argue that the in absence of properly functioning mechanisms in emerging economies like India, severe agency and information problems exist. In the current research we explore various factors drawn from agency, managerialist, resourcedependence and network perspectives to understand factors on which the compensation is based, and people involved in the compensation decisions.

The research analyzes impact of seven set of factors that include firm specific issues, board composition, compensation committee formation, CEO external networks, firm ownership patterns and firm performance, on the components of CEO compensation. The data for study has been drawn from 397 Indian firms for a period of 5 years (2001-2005). The study uses different sub samples for professionally-run and promoter-run organizations. The results exhibit differences in pay levels and factors influencing compensation decisions across promoter-run and professionally-run organizations. The compensation decisions in promoter-run organizations are based on the external networks and individual level variables of the CEO, capital intensity, and firm performance. The independent and institutional members on the board play an important role and the CEOs receive positive support from related promoters present on the compensation committees. Factors influencing compensation are CEO presence in compensation committee, duality, and public shareholding. The bottom-line of the firm and returns have a significant impact on the variable compensation. The compensation of professional CEOs is based on sector, firm’s complexity (R&D intensity and number of employees), networks (presence in industry associations), and the bottom line of the firm. The independent members play an important role in the compensation decisions. The factors that influence

the compensation decisions are CEO presence in compensation committee, tenure and public shareholding. The study contributes to the CEO compensation literature at three levels: at the first level we identify various research threads in the CEO compensation literature and present an integrated model to understand the CEO compensation, at second level we explore newer dimensions that influence CEO compensation and at third level we identify how compensation and it’s determinants differ across professionally-run and promoter-run organizations. The study identifies factors, people and situations that have influence on the compensation decisions in professionally and promoter-run organizations. The results will help managers, researchers and newer firms entering the Indian market to understand the compensation setting process in Indian firms.