Do financial constraints moderate the relationship between CEO compensation and firm performance: an emerging market evidence
ISSN: 0307-4358
Article publication date: 13 February 2023
Issue publication date: 13 July 2023
Abstract
Purpose
The current study aims to investigate the impact of firm performance on chief executive officer (CEO) remuneration in the context of an emerging market, i.e. Pakistan. Further, the interactive effect of financial constraints is investigated in the pay–performance relationship.
Design/methodology/approach
The study's sample includes 173 non-financial firms listed on the Pakistan Stock Exchange. This study covers the years 2010–2019. The CEO compensation of the sample firms is measured in terms of salary and bonuses, perquisites and stock options paid to the CEO, whereas firm profitability is measured by return on assets, return on equity, Tobin's Q (Q) and earnings per share. The KZ Index measures the degree of financial constraint. The fixed effect model (FEM) and system GMM estimation techniques were used to conclude the study's findings. In addition, to test the robustness of the results, the authors computed the level of financial constraints using the WW Index.
Findings
The findings show that firm performance has a significant positive impact on CEO compensation in all profitability measures except Tobin's Q. Further financial constraints have a significant negative impact on CEO compensation. The interactive variables of FC with all profitability measures have a significant negative impact on CEO compensation.
Originality/value
This study examines the relationship between firm performance and CEO compensation. Furthermore, the current study expanded the analysis by incorporating the role of financial constraints in the pay–performance relationship, which has not previously been tested, particularly in the context of an emerging market.
Keywords
Citation
Farooq, M., Khan, M.I. and Noor, A. (2023), "Do financial constraints moderate the relationship between CEO compensation and firm performance: an emerging market evidence", Managerial Finance, Vol. 49 No. 8, pp. 1355-1376. https://doi.org/10.1108/MF-10-2022-0474
Publisher
:Emerald Publishing Limited
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