This creating strong linkage between compensation and performance companies

This
research contemplates to inspect the impact of directors’ remuneration on firm
performance as a well-established corporate governance mechanism analyzing top
15 companies in the market capitalization index from listed companies in the Colombo
Stock Exchange for the period 2012-2016. Data collected from the database in
the Colombo Stock Exchange and annual reports of the sample companies. Cash compensation
is the proxy used for directors’ remuneration where ROA, ROE and Tobin’s Q act
as the proxy of firm performance. Collected data are analyzed using the
multiple linear regression analysis.

Keywords: Corporate Governance, Agency, Directors’ Remuneration

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1          
Research Background

Corporate governance is an emerging concept in
modern business world originated in United Kingdom which many researches has
been carried out on corporate governance recently to figure out the
relationship between firm performance and corporate governance. However the
association between firm performance and corporate governance is a broadly
argued topic in developed countries and it has started to discuss on this topic
in developing countries as well.

Akshita and Chandan (2016)
indicated that fragile corporate governance systems cause to the downfall of
companies and suggests the need of a corporate governance system that is strong
and stable. Moreover there is a positive likelihood of having accounting frauds
and agency problems in a company with weak corporate governance system.

Corporate governance is structured to solve the
problems arise when implementing the agency between the managers (agent) and
the shareholders (principal). Agency theory applies in this regard to the
relationship between corporate governance and firm performance. Raithatha and Komera (2016)
have perceived that the principals expect to optimize shareholder value by executives’
actions where goals of the executives may be different. Stakeholders as well as
directors both are interested in economic incentives for their own benefit
individually and they work for their individual benefit.

Further Raithatha and Komera (2016)
describe the link between executive pay and firm performance is taken out from
the agency theory. Majority of the arguments has suggested that the CEO
compensation need to be line up with firm performance. And they mentioned that
the compensation agreements with managers should be planned to attract the managers’
interests towards shareholder interests and by creating strong linkage between
compensation and performance companies able to retain and attract more
productive managers.

On the other hand Peng and Mansor (2015)
clearly describes that the directors have the responsibility to check whether
the stakeholders are satisfied and to direct the company towards its expected
achievements. As a result there is an increasing demand for effective directors
and to retain and attract effective directors companies need to provide them
with satisfactory remuneration.

Majority of the CEO compensation consists of
incentives and the question of whether the CEO is overpaid rose due to the
increases in stock market and stock options and offering CEO with incentives
based on stock market performance. Further it says that the CEO compensation needs
to be aligned with the both individual and corporate performance. (S.,
2008)

When various researches are attempted to figure out factors
effecting CEO pay and its link to
Firm performance, H. and R. (2005)
reasoned that the CEO pay is
depending on the firm’s competitive behavior. They point out two reasons for
their argument. On reason is, it interpret the desired actions of the CEOs
effecting their remuneration and next awareness and contribution of the
directors deciding CEO
remuneration.

However in this research by investigating the
influence of directors’ remuneration to firm performance, it is expected to
find out whether the directors remuneration acts as a significant mechanism to
reduce principal agency conflict and whether the firms can retain effective
directors who actively contribute the better firm performance by offering
higher remuneration.

Corporate governance is a very useful modern concept
that most of the countries moving towards and making arguments on it. Many
researches have been conducted based on the relationship between directors’
remuneration and firm performance all over the world in many countries whereas
there are handful of researches have conducted in Sri Lankan context for the
same relationship and corporate governance is a concept that Sri Lankan
companies need to pay more concern.

On the other hand corporate governance in various
countries differs due to the changes in economic, political and social context.
In that case researches led in foreign context are not applicable in Sri Lanka
context. Further when comparing the studies on corporate governance most of the
studies are based on board characteristic rather than directors remuneration.

In that case this research is looking into the
relationship of directors’ remuneration and firm performance of top 15
companies listed in Colombo Stock Exchange (CSE) related to the Sri Lankan
context.

1.1        
Research Question

The research question addressed in this research
study is,

·        
Is there a significant relationship
between directors’ remuneration and firm performance?

1.2        
Research Objectives

Objective of the research is,

·        
To investigate the relationship of
directors’ remuneration and firm performance.

The findings of this study can be used as a tool for
reviews. And, this study will provide information that will be used by the
managers, shareholders, competitors, investors, regulatory users, other
professional institutions, researchers and others. This study expects to
explain the relationship between directors’ remuneration and firm performance
through findings.

Especially by this research, it is expected to
introduce a new approach to the agency between owners and directors in Sri
Lanka to direct firms to desired goals and objectives. And provide guidance to
retain and attract skillful directors in the entity through introducing better
compensation packages.

This
research contemplates to inspect the impact of directors’ remuneration on firm
performance as a well-established corporate governance mechanism analyzing top
15 companies in the market capitalization index from listed companies in the Colombo
Stock Exchange for the period 2012-2016. Data collected from the database in
the Colombo Stock Exchange and annual reports of the sample companies. Cash compensation
is the proxy used for directors’ remuneration where ROA, ROE and Tobin’s Q act
as the proxy of firm performance. Collected data are analyzed using the
multiple linear regression analysis.

Keywords: Corporate Governance, Agency, Directors’ Remuneration

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

 

 

 

 

 

 

 

 

 

 

 

 

 

1          
Research Background

Corporate governance is an emerging concept in
modern business world originated in United Kingdom which many researches has
been carried out on corporate governance recently to figure out the
relationship between firm performance and corporate governance. However the
association between firm performance and corporate governance is a broadly
argued topic in developed countries and it has started to discuss on this topic
in developing countries as well.

Akshita and Chandan (2016)
indicated that fragile corporate governance systems cause to the downfall of
companies and suggests the need of a corporate governance system that is strong
and stable. Moreover there is a positive likelihood of having accounting frauds
and agency problems in a company with weak corporate governance system.

Corporate governance is structured to solve the
problems arise when implementing the agency between the managers (agent) and
the shareholders (principal). Agency theory applies in this regard to the
relationship between corporate governance and firm performance. Raithatha and Komera (2016)
have perceived that the principals expect to optimize shareholder value by executives’
actions where goals of the executives may be different. Stakeholders as well as
directors both are interested in economic incentives for their own benefit
individually and they work for their individual benefit.

Further Raithatha and Komera (2016)
describe the link between executive pay and firm performance is taken out from
the agency theory. Majority of the arguments has suggested that the CEO
compensation need to be line up with firm performance. And they mentioned that
the compensation agreements with managers should be planned to attract the managers’
interests towards shareholder interests and by creating strong linkage between
compensation and performance companies able to retain and attract more
productive managers.

On the other hand Peng and Mansor (2015)
clearly describes that the directors have the responsibility to check whether
the stakeholders are satisfied and to direct the company towards its expected
achievements. As a result there is an increasing demand for effective directors
and to retain and attract effective directors companies need to provide them
with satisfactory remuneration.

Majority of the CEO compensation consists of
incentives and the question of whether the CEO is overpaid rose due to the
increases in stock market and stock options and offering CEO with incentives
based on stock market performance. Further it says that the CEO compensation needs
to be aligned with the both individual and corporate performance. (S.,
2008)

When various researches are attempted to figure out factors
effecting CEO pay and its link to
Firm performance, H. and R. (2005)
reasoned that the CEO pay is
depending on the firm’s competitive behavior. They point out two reasons for
their argument. On reason is, it interpret the desired actions of the CEOs
effecting their remuneration and next awareness and contribution of the
directors deciding CEO
remuneration.

However in this research by investigating the
influence of directors’ remuneration to firm performance, it is expected to
find out whether the directors remuneration acts as a significant mechanism to
reduce principal agency conflict and whether the firms can retain effective
directors who actively contribute the better firm performance by offering
higher remuneration.

Corporate governance is a very useful modern concept
that most of the countries moving towards and making arguments on it. Many
researches have been conducted based on the relationship between directors’
remuneration and firm performance all over the world in many countries whereas
there are handful of researches have conducted in Sri Lankan context for the
same relationship and corporate governance is a concept that Sri Lankan
companies need to pay more concern.

On the other hand corporate governance in various
countries differs due to the changes in economic, political and social context.
In that case researches led in foreign context are not applicable in Sri Lanka
context. Further when comparing the studies on corporate governance most of the
studies are based on board characteristic rather than directors remuneration.

In that case this research is looking into the
relationship of directors’ remuneration and firm performance of top 15
companies listed in Colombo Stock Exchange (CSE) related to the Sri Lankan
context.

1.1        
Research Question

The research question addressed in this research
study is,

·        
Is there a significant relationship
between directors’ remuneration and firm performance?

1.2        
Research Objectives

Objective of the research is,

·        
To investigate the relationship of
directors’ remuneration and firm performance.

The findings of this study can be used as a tool for
reviews. And, this study will provide information that will be used by the
managers, shareholders, competitors, investors, regulatory users, other
professional institutions, researchers and others. This study expects to
explain the relationship between directors’ remuneration and firm performance
through findings.

Especially by this research, it is expected to
introduce a new approach to the agency between owners and directors in Sri
Lanka to direct firms to desired goals and objectives. And provide guidance to
retain and attract skillful directors in the entity through introducing better
compensation packages.

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