Board Compensation, Corporate Governance, and Firm Performance in Indonesia

Abstract:     
This paper examines the determinants of board compensation in a developing economy that adopts a two-tier board structure system. Corporate governance structure, firm-specific characteristics, and firm performance are hypothesized as significant determinants. The sample consists of 442 firm-year observations, comprising 255 listed firms on the Indonesia Stock Exchange (IDX) in the financial years 2006 and 2007. I provide empirical evidence that profitability, firm size, and the number of board members are positively associated with compensation level. Smaller firms are found to spend higher proportion of their financial resources to compensate their board members. Additionally, firm size and family control play important roles in explaining the relationship between board compensation and firm performance. Further, this study investigates pay-performance sensitivity and reveals that changes in firm value are positively associated with changes in board compensation.

Number of Pages in PDF File: 45

Keywords: board compensation, corporate governance, Indonesia, pay-performance sensitivity, two-tier board

JEL Classification: G34, J33, M12, M52

working papers series