Chief executive officer compensation, corporate governance and performance: evidence from KSA firms

• Pages: 1216-1235
• DOI: https://doi.org/10.1108/CG-09-2017-0228
• Published date: 02 October 2019
• Date: 02 October 2019
• Author: Gaafar Abdalkrim

Chief executive off‌icer compensation,

corporate governance and performance:

evidence from KSA f‌irms

Gaafar Abdalkrim

Abstract

Purpose –This paper aims to examine the relation between chief executive officers (CEOs)

compensation andorganizational performance in KSA listed companies.It also aims at investigating the

effectof corporate governance mechanismsaccording to this relation.

Design/methodology/approach –The researcher uses unbalancedpanel data regression analysis on

a sample of 181KSA listed companies from 2005 to 2014.

Findings –The estimation result suggests that CEO Compensation is positively associated with firm

performance. The results also show that corporate governance positively and significantly affect the

relationbetween CEO Compensation and performance.

Research limitations/implications –This research, like any other, has some limitations that can be

addressed by future research.The important limitation of this research is that the generalizability of the

results is limited by the fact that the majority of the firmsin the sample are from material sector whichis

represented by 42 (32 per cent) firms versus pharmaceuticalsector which is represented by only one

(1 per cent) firm. Therefore, a future research can tackle the effect of CEO compensation, corporate

governanceon future firm performance independently.

Practical implications –The findings have some important implications for stakeholders such as

policymakers, listedfirms managers, business owners and academic researchers in the emerging KSA

market. Besides, understanding the relation between CEO compensation, corporate governance and

firm performancecan aid the success of corporatemodernization and economic reformin KSA.

Originality/value –The research attempts tofill a substantial gap in the literature by providing the first

rigorous econometricsevidence on CEO compensation,corporate governance and firm performance.In

addition,it provides interesting insight for researches,decision-makers and boardmembers in KSA.

Keywords CEO Compensation, Firm performance, Corporate governance, Panel data analysis,

Multivariate CKSA

Paper type Research paper

1. Introduction

Chief executive officers (CEOs) can simply be defined as the leaders of firms, whose

responsibility is to serve as themain link between the board of directors (the board) and the

firm’s various parties or levels. Moreover,they maintain and implement the corporate policy

and they are solely responsible for the firm’s success or failure. The relation between CEO

Compensation and firm performance has been one of the most widely debated issues and

core research area in a burgeoning corporate governance literature as its stimulant

mechanism to mitigate agency problem (Raithatha and Surenderrao, 2016;Ashley, 2015;

Dodonova and Khoroshilov (2014),Li et al.,2013). Thus, CEO compensation has received

considerable critical scrutiny. Defenders of high CEO pay point to skilled CEOs’ ability to

lead their organizations to exceptionally strong performance. From their perspectives,

paying a CEO many millions of dollars annually is a great investment if the CEO rescues a

Gaafar Abdalkrim is

associate professor of

Business Administration at

Prince Sattam bin

Abdulaziz university,

College of Science and

Humanity-Alsulail, ALSulail,

Saudi Arabia.

Received 26 September 2017

Revised 2 January 2019

16 April 2019

8 June 2019

Accepted 10 June 2019

PAGE 1216 jCORPORATE GOVERNANCE jVOL. 19 NO. 6 2019, pp. 1216-1235, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-09-2017-0228

struggling firm from doom or increasesa solid company’s profits dramatically (Shelley et al.,

2013).

The main claim of this empirical study is to investigate the relationship between CEO

compensation, corporate governance, and KSA corporate performance using a unique

dataset of (Gulf Cooperation Council [GCC]), which contains compensation data on top

executives and financial data of firms overa period of past 10 years (2005-2014). According

to our limited knowledge, it could be argued that very few studies have been conducted on

the CEO compensation in Gulf countries in general and in KSA, in particular. This is mostly

due to limited data available in this area. Perhaps this is reason why the associated of CEO

compensation with corporateperformance still remains very much gray area.

With all these in mind, this study aims at achievinga number of objectives:

First, it strives to bridge the gapin the literature by providing the first rigorous econometrics

evidence on CEO compensation with corporate performance and by contributing to a better

understanding of CEO compensationcontrasting.

Second, it tries to examine the relation between CEO, compensation, and organizational

performance in KSA listed companies. Third, it endeavors to document the role of a firm’s

corporate governance extemporizing upon the empirical approach of Jaiswal and

Bhattacharyya (2016). Finally, it attempts to provide new insights into this topic for the

benefit of researches, decisionmakers, and board members in KSA.

As mentioned before, the main purpose of this study is to investigate the relation between

CEO compensation, corporate governance, and organizational performance within the

context of the KSA. It could be said that the emphasis on KSA is especially important

because it was observed that several researches regarding CEO and its effect on firm

performance have been conducted in western developed countries markets and very

little is known about CEO compensation, corporate governance in the Middle East. Unlike

other countries such as UK, and US KSA provides an excellent advantage in conducting

corporate governance researches because of the Islamic-economic system that takes a

middle ground between the systems of Marxism and capitalism. Moreover, KSA is an

active member of GCC. In addition and most importantly, KSA economy is considered

the largest in the (GCC) countries. This particular point might give us an opportunity to

generalize our research findings to other GCC firms as the managerial, economic, social

and political environment in those countries are almost the same. Furthermore,

conducting a study in KSA context highlights some of its prominent features making it

stands out in comparison to other emerging and developed countries. In addition, the

increasing number of the listed companies in the KSA during the period 2005 to 2014

required and promoted efforts to enhance the effectiveness of the CEO compensation to

improve the firm performance.

In the light of this background, this study is considered unique to examine the effect of the

CEO compensation on the performanceof the KSA companies.

Interestingly, though executive compensation is one of the more studied topics within the

management literature (Miles et al., 2007), there is limited intersection with corporate

governance. Thus, the relationship between the two fields is beyond the scope of this

paper. The evidence suggests that firm performance measured by accounting, as well as

market-based measures, significantly affects executive compensation. This result is in line

with the some related studies (Sen and Sarkar, 1996;Ghosh, 2006;Raithatha and

Surenderrao, 2016). The results of the current study also revealed there is a positive and a

significant influence of corporate governance on the relationship between CEO

compensation and firms’ performance.

This research is significantly important as it contributes to the existing literature in several

ways:

VOL. 19 NO. 6 2019 jCORPORATEGOVERNANCE jPAGE 1217