Board Compensation, Corporate Governance, and Firm Performance in Indonesia

45 Pages Posted: 9 Aug 2011  

Salim Darmadi

Indonesia Financial Services Authority (OJK)

Date Written: August 9, 2011

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.

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

JEL Classification: G34, J33, M12, M52

Suggested Citation

Darmadi, Salim, Board Compensation, Corporate Governance, and Firm Performance in Indonesia (August 9, 2011). Available at SSRN: https://ssrn.com/abstract=1907103 or http://dx.doi.org/10.2139/ssrn.1907103

Salim Darmadi (Contact Author)

Indonesia Financial Services Authority (OJK) ( email )

Bidakara 1, Jalan Jend. Gatot Subroto Kav. 71-73
Jakarta, Jakarta 12870
Indonesia

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